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ECONOMIC ESSAYS 



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ECONOMIC ESSAYS 



BY 

CHARLES FRANKLIN DUNBAR 

LATE PROFESSOR OF POLITICAL ECONOMY IN HARVARD UNIVERSITY 



EDITED BY 

O. M. W. SPRAGUE 

ASSISTANT PROFESSOR OF ECONOMICS IN HARVARD UNIVERSITY 



itf) an Entrotiuctton 

BY 

F. W. TAUSSIG 

HENRY LEE PROFESSOR OF ECONOMICS IN HARVARD UNIVERSITY 



THE MACMILLAN COMPANY 

LONDON: MACMILLAN & CO., LTD. 
I904 

All rights reserved 



LIBRARY cf CONGRESS 
Two Copies Received 

NOV 16 19U4 
Copyneru tatty 

CUSS CU XXc, No 
COPY B. f 






Copyright, 1904, 
By THE MACMILLAN COMPANY. 



Set up and electrotyped. Published November, 1904, 



Norwood Press 

J. S. Cashing & Co. — Berwick & Smith Co. 

Norwood, Mass., U.S.A. 



£f 



CONTENTS 

PAGE 

Introduction . ........... vii 

I. Economic Science in America, i 776-1 876 . . . . 1 

II. The Reaction in Political Economy 30 

III. The Academic Study of Political Economy ... 52 

IV. Ricardo's Use of Facts 68 

\ . Some Precedents Followed by Alexander Hamilton . 71 

VI. The Direct Tax of 1861 94 

VII. The New Income Tax 116 

VIII. Early Banking Schemes in England . . - . . . 135 

IX. The Bank of Venice , 143 

X. Accounts of the First Bank of the United States . 168 

XI. Deposits as Currency 172 

XII. The Bank-note Question 188 

• XIII. The Safety of the Legal Tender Paper .... 207 

XIV. The National Banking System 227 

XV. Can we keep a Gold Currency ? 248 

XVI. The Crisis of 1857 266 

XVII. The Crisis of i860 294 

XVIII. State Banks in i860 314 

XIX. The Establishment of the National Banking System . 330 

XX. The Circulation of the National Banks, 1 865-1900 . 346 

Index 365 



INTRODUCTION 

Charles Franklin Dunbar was born at Abington, Massachu- 
setts, July 28, 1830, and died at Cambridge, Massachusetts, Janu- 
ary 29, 1900. For nearly thirty years, from 187 1 until his death, 
he was Professor of Political Economy in Harvard University ; and 
it was during this period that he prepared the essays printed in 
the present volume. 

Professor Dunbar did not enter on his academic career, how- 
ever, until he had passed the age of forty. The best years of his 
early manhood were given to work of a very different sort. For 
ten years he was editor of a daily newspaper ; a phase of his life 
little known to those who afterwards felt his influence as teacher 
and author, but one in which his success was no less marked. 

After graduating from Harvard College, in 185 1, he engaged 
for a short time in business ; health failing, spent a year at farm- 
ing ; then entered on the study of the law, and was admitted to 
the bar in 1858. Meanwhile, contributions from his pen had 
appeared in the Boston Daily Advertiser. In 1859 ne became 
part owner and associate editor of that newspaper, and soon was 
sole responsible editor. From 1859 to 1869 all his energies were 
given to its editorial and business management. 

These ten years witnessed the most perilous and momentous 
events in the country's history. The times were trying for all 
men, and not least so for a high-minded man in charge of an im- 
portant daily newspaper. Rapid decisions were called for on 
great questions ; news of vital concern had to be gathered, sifted, 
presented ; the conflicting tides of opinion in the community had 
to be at once followed and guided. The Advertiser, as conducted 
by Professor Dunbar, was a model newspaper, and deserved its 
position as the most influential journal in New England. It stood 
stoutly for the cause of the North, and never abated its unfaltering 
faith in the justice of that cause and in its ultimate triumph. Its 

vii 



viii INTRODUCTION 

support of President Lincoln and his associates was firm, yet not 
slavish. Professor Dunbar was by nature conservative and judi- 
cial, and both sides of a disputed question presented themselves to 
his mind. It is probable that on many of the measures re- 
sorted to during and after the Civil War he had his own doubts 
and reservations. But those were times for united action, and 
such the Advertiser stood for. Its editorials, written without 
exception by him, show a warmth and exaltation of spirit very 
different from the measured tone of the scientific papers printed 
in the present volume. And thus they show an aspect of the 
man not so conspicuous to the reader of these sober and judicial 
writings : a capacity for great enthusiasm and a fervid love of the 
right. 

The conduct of a daily newspaper, however far-reaching it 
may be in its influence on public affairs, rarely gives rise to con- 
tributions of permanent value to science or literature. To this 
rule Professor Dunbar's editorial career offers no exception. No 
one would have been more averse than he to a reprint of selections 
from his writings in the Advertiser. Yet in another sense these 
writings have a permanent value of the highest sort. Here is a 
record from day to day of the history of the United States during 
its most dramatic and trying decade — a record prepared or super- 
vised by a man of great sagacity, of unswerving patriotic spirit, of 
scrupulous truthfulness, and of high skill in exposition. To the 
friends and associates of Professor Dunbar, his editorials still have 
a value, in that they show the intellectual and moral qualities of the 
man. To the future historian, wishing to come close to the march 
of events when our own still vivid recollections of the Civil War 
shall have faded away, they will have a much higher value. They 
reflect in the mirror of a clear and well-tempered mind the im- 
pressions of every day's events in those ten years of fierce com- 
bat and slow recovery. 

The financial and economic events of the period were of the 
most extraordinary kind. A huge national debt was incurred ; 
paper money was issued to an excess that caused great and 
sudden depreciation ; a wide-reaching system of excise taxes was 
rapidly created, and as rapidly swept away; a high protective 
tariff was set up, and unexpectedly retained ; millions of slaves 
became freedmen, and the entire industrial organization of the 



INTRODUCTION ix 

South was revolutionized. Professor Dunbar's attention was 
necessarily given to all phases of the country's history, but the 
financial and economic phenomena enlisted his special interest. 
He gathered a fund of experience such as few economists have 
been fortunate enough to possess. He learned much in the later 
years of his scholarly life, and settled on conclusions and prin- 
ciples which were not accurately defined in his mind during his 
newspaper career. But it may be doubted whether any research 
was so productive or any experience so profitable as the unremitting 
observation and reflection during these years of varied economic 
history. Scholarly as his work was in later life, and recondite as 
were some of his researches, he never became a closet economist. 
Whether discussing contemporary proposals for legislation on the 
currency, or the history of banks in past centuries, he kept a 
close view of the working of economic forces in their concrete 
details. 

The best years of his life and the best of his strength were 
given to the Advertiser. It is probable that he never recovered 
completely from the strain then endured. In 1869 his health 
seemed sapped, and he was glad to dispose of his interest in the 
paper and to withdraw from its management. Fifteen years later, 
when he had been long settled in his academic post, he was sud- 
denly called on to conduct it again, during a brief period of stress. 
In 1884 the Republican party nominated for the presidency Mr. 
Blaine, whom many independent Republicans could not conscien- 
tiously support. The Advertiser had then come into the hands of 
friends and associates of Professor Dunbar's. Over night, a deci- 
sion had to be reached whether to support the nomination or to 
bolt. The bolt was voted ; whereupon the editor, who would not 
abandon Mr. Blaine, resigned on the spot. Professor Dunbar was 
asked to step into the breach, and did so without hesitation. 
Stanch as he had been in support of the Republican party during 
its days of storm and stress, he was equally stanch in opposing it 
when it fell into ways he thought evil. Immediately after the 
election of 1884, he resumed undivided attention to academic 
duties. 

Shortly after his retirement from the Advertiser, in 1869, he 
was asked by President Eliot, then just entering on his career as 
head of Harvard University, whether he would accept a professor- 



x INTRODUCTION 

ship of political economy in that institution. He doubted his 
qualifications for the post, and for a time would give no answer. 
He finally assented, but first gave two years to travel and study 
in Europe. He was formally appointed to his professorship in 
1 87 1, and entered on its duties in the fall of that year. 

As his hesitancy in accepting the appointment showed, Pro- 
fessor Dunbar was keenly alive to the need of adequate equipment 
for his new duties, and unduly modest as to his own com- 
petence. At that time it would have been a rare chance to find 
a man better equipped. Systematic training in economics, such 
as is now offered in a dozen American universities, — and is so 
offered, it may be added, largely as a result of the growth of 
economic study in Harvard University under Professor Dunbar's 
own guidance, — was then unknown in this country and in England, 
and was barely begun in Germany. Any appointee to a professor- 
ship in the subject must then have been a self-made economist. 
There were, it is true, not a few persons, with more or less repute 
as writers on economic topics, on whom, rather than on the little- 
known editor, the choice of the Harvard Corporation might have 
fallen. Yet that choice proved a singularly fortunate one. Pro- 
fessor Dunbar was by temperament a scholar, open-minded and 
judicial, averse to the superficial treatment of any topic, and with 
interests that looked far beyond the horizon of the day. He 
possessed, also, what men of scholarly bent often lack, both 
executive capacity and sound judgment, and thus became an 
invaluable coadjutor and counsellor in the tasks that lay before 
the new administration of the University. Not only was he the 
natural leader in the organization of the instruction which most 
directly concerned him ; he took also a large part in the rapid 
transformation of the institution from a small college with loosely 
attached professional schools into a great and consistently organ- 
ized university. 

For many years after his appointment Professor Dunbar 
was virtually engaged in equipping himself as a teacher of eco- 
nomics. Cherishing high ideals of scholarship, he delved in the 
earlier and later literature of his subject. He became widely read 
in the classic writers of England and France. It was not until 
a later period that he turned to German writers also, who indeed 
hardly deserved attention in so great degree at the outset of his 



INTRODUCTION xi 

academic career. He knew his Locke and Hume, Quesnay and 
Turgot, Adam Smith and Malthus and Ricardo and Mill, not 
to mention Say, Senior, Storch, Rossi, Bastiat, and the whole 
host of minor writers. Perhaps he gave an undue amount of 
time to some parts of this reading. There was in him not only 
a strong historical bent, but a streak of antiquarianism. A lively 
curiosity of this sort sometimes led him, in later years as well as 
during this formative period, to follow clews and unravel minor 
tangles, which after all lay apart from his dominant interests and 
diverted him from his main work. 

Not less characteristic than this absorption in the general 
literature of economics was his complete abstention from the 
discussion of current questions of economics and politics. His 
experience as editor had informed him of every detail in contem- 
porary history, and had habituated him to constant and prompt 
discussion of questions of the day. It would have been natural 
that, as professor, he should continue such discussion. He never 
did so, and consistently rejected all proposals to contribute to 
periodicals on current topics. No doubt this was due in some 
degree to weariness of work of the sort : ten years of newspaper 
writing had sated him. In part, also, it was due to innate 
conservatism of judgment. But most of all, it was due to his 
ideal of the duties of the University teacher. Such a teacher 
should be, as he believed, a leader in thought and in investiga- 
tion, elucidating the principles on which the solution of current 
problems must depend, contributing by slow accretions to the 
mass of information on which the advance of knowledge must 
rest, and leaving it for others to spread abroad and apply the results 
of the scholar's research. 

While thus engaged in equipping himself more fully for his 
duties as professor, he was also soon drawn into the adminis- 
trative work of the University. For such work he was eminently 
fitted, and his strong sense of loyalty to the University and to 
its head led him to enter on it, if not with zest, at least with 
strong interest and willing spirit. In 1876 he was elected Dean 
of Harvard College, and remained in that post until 1882. When 
the enlarged and remodelled Faculty of Arts and Sciences was 
organized in 1890, he became its first Dean, and so acted until 
1895. In addition, he served repeatedly on committees, and his 



xii INTRODUCTION 

aid and counsel were unfailingly asked when any large question 
of policy was under consideration. Of such questions there was 
a plenty throughout his academic career. President Eliot found 
in him a warm friend, as well as a stanch supporter and wise 
counsellor, and frequently called on him for conference and 
advice. The great measures of that brilliant administration, — 
the extension of the elective system, the increase and broadening 
of the requirements for admission, the liberal and manly policy 
in dealing with undergraduates, the elevation of the professional 
schools, the creation and fostering of advanced instruction and of 
the Graduate School, — all enlisted his support, and all brought a 
drain on his time and energy. The labor he was thus called on 
to perform was cheerfully assumed and borne, yet was felt to be 
a distraction from the scholarly work which he regarded as the 
vital part of his academic duties. 

The various circumstances described in the preceding para- 
graphs — the ten years of newspaper work, the period of conscien- 
tious preparation for the professor's duties, the repeated pressure 
of administrative work — account for the comparatively small 
amount of Professor Dunbar's publications. In 1876 he con- 
tributed to the North American Review, then still a scholarly 
repertory, the article on " Economic Science in America," which is 
the first of the papers reprinted in the present volume. After 
this modest beginning there was a long period of silence. For the 
use of his classes in the University, he soon began to collect docu- 
ments and put together materials ; and out of these grew impor- 
tant works. The financial history of the United States had of 
necessity enlisted his attention while editing the Advertiser, and he 
early prepared careful lectures on this subject. For use in connec- 
tion with the lectures, he printed privately, in 1875, a selection of 
the laws of the United States on currency and finance. His researches 
steadily widened, and as the instruction in the University grew, he 
gave an independent course on the financial history of the country, 
— a course remembered with admiration by a long series of grate- 
ful students. For use in this instruction he published in 1891 the 
volume of " Laws of the United States on Currency, Finance, and 
Banking " (Boston : Ginn & Co.). To the average reader, and even 
to some hasty fellow-scholars, this had the appearance of an easy 
task : a simple reprint of matter from the statute-book. But the 



INTRODUCTION xiii 

selection of all the important laws, the rejection or compression of 
the less important, the unearthing of vetoed bills and other histori- 
cal documents, the cross-references to apposite sources, — these 
show the author's scholarly qualities at their best. The volume is 
characteristic in another way. It was Professor Dunbar's undevi- 
ating habit to turn to the primary sources of information, to 
statutes, official documents, the writings of contemporaries. He 
trained his students likewise never to content themselves with 
secondary sources. Hence he prepared for their use collections of 
documents such as this volume contained, modestly putting in the 
background his own skill and labor in selection and preparation. 

The book by which he is best known to the general public 
grew in a similar way out of his teaching. Side by side with his 
general economic reading, he began at an early date to give special 
attention to the subjects which most attracted him, — the theory 
and history of currency, banking, and public finance. Finding no 
serviceable book to put into the hands of his students, he prepared 
something on banking, as he had done on financial history. In 
1885 he printed for the use of students, again privately, certain 
chapters on banking. Expanded and revised, these were published 
in 1891, under the title "Chapters on the Theory and History of 
Banking " (New York : G. P. Putnam's Sons). A second edition, 
again revised throughout, was in course of preparation and well 
advanced at the time of his death, and was carried to completion 
by the editor of the present volume, Dr. O. M. W. Sprague. The 
little volume shows Professor Dunbar's qualities at their best, and 
deserves its place as a classic on the subject. Planned originally 
for the use of college students, it retained in the successive editions 
the directness and conciseness of a book addressed to those new 
to the topic. Yet, alike in the exposition of principles and in their 
illustration by concrete example and by history, it goes to the root 
of things, and leaves the most competent critic with no sense of diffi- 
culties skimmed over. A wide range of learning is shown in the 
notes and the historical sketches, yet with no parade, and with 
rigid exclusion of irrelevant matter. 

In 1886 the University was enabled, by the gift of an adequate 
guarantee fund, to authorize the publication of the Quarterly Journal 
of Economics, of which Professor Dunbar was at once appointed 
editor. The establishment of the Journal opened virtually a new 



xiv INTRODUCTION 

phase in his career. For the remaining years of his life he gave 
to it a large share of his time. The task of editing was congenial 
to one of his reserved temperament ; and a taste for work- 
manlike effects made him take a satisfaction in the niceties of 
typography and appearance, as well as in solidity of contents. 
His guiding principle as editor was the sound and simple one of 
conducting a journal for investigators, a medium of communication 
for those who had something to contribute to the advance of 
knowledge. He succeeded from the outset in making for the 
Journal a distinguished place in the literature of the subject, and 
in securing notable papers from scholars the world over. Through 
it he exercised an important influence in stimulating the remarkable 
advance of economic science which took place in the United States 
in the decade after its establishment ; and Professor Dunbar was 
content with what he had here achieved, and found in it some solace 
for his failure to carry out plans for independent publication. 

His own contributions to the Journal, however, were important 
both in quality and quantity. As it happened, the teaching staff in 
the department of economics at Harvard University was enlarged at 
the time of the establishment of the Journal, and he was enabled 
to turn over to younger hands the instruction in parts of the sub- 
ject of which he had grown weary, and to devote himself to others 
that had always chiefly interested him. His duties as editor at 
the same time impelled him to put together some results of his 
researches. But for this pressure, much more of the work he had 
planned would probably have been left undone. Great modesty 
and a high degree of indifference to the world's applause 
combined with lack of physical vigor in making him slow to 
put pen to paper. Fortunately, the obligations which he felt 
as editor led him to contribute with some degree of freedom to 
the columns of his Journal. The present volume is made up 
chiefly of those contributions. They tell their own tale as to 
the quality of his mind and the range of his interests. Those 
on current problems, — on the lessons of our legal tender cur- 
rency, on the remodelling of the national banking system, on the 
income tax, — naturally attracted most attention at the time of 
their publication, and, in the slow progress of reform, will be read 
with profit for years to come. But their author took greater sat- 
isfaction in the papers on less familiar topics, such as those on the 



INTRODUCTION XV 

Bank of Venice, the Precedents followed by Alexander Hamilton, 
and the history of the Direct Tax in the United States. He had a 
just pride in doing a task thoroughly, — in putting on record once 
for all the definitive results of exhaustive inquiry. 

These papers, though each is in a sense complete in itself, are 
yet fragments from larger work. Those on the finances of the 
United States are the outcome of prolonged investigation, cover- 
ing the whole range of the subject, which was expected to lead to 
a systematic history. Unfortunately Professor Dunbar allowed 
himself to be deterred from this project, for which no one was 
so well equipped, by the publication of a pretentious but highly 
unsatisfactory book by another hand on the same subject. He had 
pushed his way into the literature on the history of banking ; and 
here also the essays on the Bank of Venice in the present volume, 
and the chapter on the Bank of Amsterdam in his book on Bank- 
ing, represent only a portion of his learning. He had gathered a 
large and interesting store of contemporary material on the Assig- 
nats of the French Revolution, and had noted the peculiarities in 
the course of the depreciation of that curious issue of paper money. 
He had followed the history of commercial crises through two cen- 
turies, with special regard to the supposedly regular recurrence of 
these industrial storms, and had begun the preparation of a care- 
ful monograph on the question of their periodicity. He had made 
an exhaustive study of the financial administration of Alexander 
Hamilton ; but of this also nothing was put on record except the 
essay on the Precedents followed by Hamilton. He had conducted 
at the University systematic courses of instruction on still other 
topics : on the theory and methods of taxation ; on financial admin- 
istration and public debts in the leading countries; and on the 
economic history of Europe and America since 1763. On the 
subject-matter of these courses he was led both by an alert intel- 
lectual curiosity and by conscientious devotion to academic duty, 
to carry his work much farther than was called for by the strict 
needs of teaching. He cannot be absolved from the blame of hav- 
ing in some degree scattered his energies. 

Among the notes and papers found after Professor Dunbar's 
death, some were in such a stage of completion as to warrant 
their publication. He had begun a history of banking in the 
United States since i860, and of this the first three chapters were 



XVI INTRODUCTION 

virtually completed. They are printed in the present volume, and 
illustrate adequately the style and the method of his maturest 
days. Of quite a different kind are the accounts of the crises of 
1857 an d i860. They were prepared at an early stage in his aca- 
demic career ; certainly as early as 1875, and not improbably before 
1876. That Professor Dunbar left these papers in his desk for 
over twenty years without taking any steps toward printing them, 
indicates that he was not disposed to give them to the public ; and, 
indeed, the mode of treatment is not such as he would have followed 
in later years. Yet they are contributions of no mean value to the 
economic history of the United States and to the history of crises, 
and are accordingly included in the present volume, notwithstanding 
the author's evident doubts as to their suitability for publication. 

Professor Dunbar was by nature reserved, and as to his own 
work unduly modest. With his reserve went a quiet dignity which 
was often mistaken for coldness. Even those who enjoyed his 
closer acquaintance sometimes found him silent and uncommuni- 
cative. But in intercourse with intimate friends this veil disap- 
peared, and he became no less warm-hearted than charming. He 
had a keen sense of humor, enjoyed alike to hear and to tell a 
good story, and saw the mirthful side of every subject. These 
attractive lighter qualities unfortunately showed themselves little 
in his dealings with students. With classes of mixed undergradu- 
ates he never was a highly successful teacher. He hesitated to 
commit himself on those large questions, the most difficult to 
answer, which arise in a survey of the subject as a whole, and he 
was thus less effective and stimulating than one who was willing 
rashly to plunge into the discussion of fundamentals. On the 
other hand, he was an ideal teacher on the special topics to which 
he confined himself in the later years of his life. He had a re- 
markable gift of clear and well-ordered exposition, and a remark- 
able command of apposite language. The rounded stateliness of 
diction which marks his writings showed itself also in his lectures. 
Here, with a moderate number of selected students, his sound 
judgment, his judicial temper, his nice discrimination, his thorough 
information, were fully appreciated. Those who had the privi- 
lege of his instruction under these favorable conditions felt for 
him a reverent admiration, and took from his lecture rooms noble 
ideals. 



INTRODUCTION xvii 

During the last ten years of his life Professor Dunbar's work was 
much interrupted by ill-health and waning strength. It was probably 
a sense of physical weakness that led to the slowness and hesitation 
with which, notwithstanding years of experience in writing, he took 
pen in hand for literary work. He had always to nerve himself to 
this task ; though when once it was entered on, the result was invari- 
ably happy and seemingly spontaneous. No doubt the same sense 
of weakness was in some degree the cause of the scattering of his 
energies, to which reference has already been made in this sketch. 
He found it easier and more interesting to begin on new subjects 
and follow new clews than to persist in bringing to a close investi- 
gations already well advanced. And yet, all in all, in view of the 
difficulties he had to surmount, the surprising thing is not that he 
did so little, but that he should have succeeded in achieving so 
much. 

The editing of the present volume has been in the hands of 
Dr. O. M. W. Sprague, who was Professor Dunbar's assistant 
during the last years of his activity as teacher. For those papers 
which had already been published, Dr. Sprague's task was the 
comparatively easy one of arranging them in proper order. But 
for those which were left unpublished, especially the three chap- 
ters on the history of banking in the United States, much remained 
for him to do, in verifying and completing the references, and in 
bringing the manuscript as nearly as possible into the form 
which the author would have wished. All credit for the volume 
as it stands belongs, after the lamented author, to Dr. Sprague. 

F. W. Taussig. 



ECONOMIC SCIENCE IN AMERICA, 1776-1S76 1 

The century which has elapsed since our independence was 
declared exactly covers the period for which the science of politi- 
cal economy has been a systematized branch of human learning 
and research. Before the publication of Adam Smith's " Wealth 
of Nations" in 1776, we have, indeed, discussions of detached 
topics, and even attempts here and there to throw the whole into 
connected form ; but, after all, the economist finds the foundations 
of the science, as it stands to-day, laid deep and solid for the first 
time by Adam Smith ; the great men who have since carried for- 
ward the work have declared themselves his followers, and in 
developing and extending the science have kept to the lines of 
discussion which he laid down with such vigor and insight a 
century ago. 

The science which is thus coeval with our nation has been 
studied with zeal and with measurable success in most parts of 
the world. New principles have been evolved, tested by the 
abundant experience of modern industry, and added to the body 
of ascertained truths. Unceasing discussion has enforced constant 
revision of the whole work, with increase of firmness and consist- 
ency as the issue of every threatened revolution. The field prop- 
erly occupied by the science has been surveyed and its limits 
determined, even to the disappointment of overambitious econo- 
mists or of a too expectant public. No other moral science has 
equally engaged the attention of public men, and no other, it is 
safe to say, has equally influenced public affairs, whether by the 
correct or the incorrect application of its principles. Nor has any 
nation had the monopoly of honors gained in this new pursuit. 
Adam Smith, Ricardo, and Mill have secured the leading position 
for England ; but France and Germany, and perhaps Italy, have 
made contributions of lasting importance to the subject, and 

1 North American Review, January, 1876. 



2 ESSAYS 

have never been without their full proportion of active and 
judicious investigators. Notwithstanding the priority of England 
in some remarkable advances, the centre of interest in economic 
discussion has not always rested with her; it has at times been 
in France ; it is now, probably, in Germany. In short, the science 
has been made a common possession by the efforts of all. 

When we come to inquire what part our own country has taken, 
and what contribution it has made in building up this science, we 
are struck at the outset by the fact that the growth of the United 
States has been a circumstance of prime importance in the eco- 
nomic history of the world during the century. It must be placed 
in the same rank with the brilliant succession of discoveries in the 
industrial arts, or with the extensive improvement of government 
and social organizations, as one of the half-dozen great influences 
which have changed the face of the civilized world. Without 
entering into the details of a comparison, to which every reader 
is likely to have his attention sufficiently drawn during the present 
year, we may here note a few of the facts which have given to the 
development of this country so great an influence upon that of 
the rest of the world. Beginning with the statement of mere 
area, the organized states of the Union now occupy a territory larger 
than the whole of Europe, outside of the Russian Empire. The 
improved land of these states, measuring two hundred and ninety- 
five thousand square miles in 1870, cannot be much less than the total 
improved surface of England and Ireland, France and Prussia, to- 
gether. Of this vast field of production, we may fairly say that the 
whole has been brought into the circle of international exchanges 
and added to the available resources of mankind within this cen- 
tury, so insignificant were its relations with the rest of the world a 
hundred years ago. Moreover, the products to which this territory 
is adapted by nature are such as have a singularly direct and 
important bearing on the welfare of other countries. How great 
an industrial revolution has been wrought by cotton, and what the 
nineteenth century w r ould be without that fibre, of which we pro- 
duce more than half of all that comes to the markets of Europe 
and America, it would be hard to say ; but the memory of our Civil 
War is still fresh enough to tell us what universal disaster must 
follow the interruption of our supply, and what a chain of conse- 
quences, involving the well-being, the peace, the institutions, and 



ECONOMIC SCIENCE IN AMERICA 3 

even liberty of millions of men, have followed from the addition of 
the cotton-plant to the agricultural products of the South. Of dif- 
ferent but hardly inferior significance in the economy of the world 
is our supply of gold. The astonishing expansion of industry and 
commerce for which the close of the wars of Napoleon seems to 
have given the signal, which has stimulated and been stimulated 
by our growth, is one of the great phenomena in the history of 
mankind. This expansion, however, must have been checked at 
the most critical period, had not fresh discoveries of gold supplied 
the enlarged medium of exchange required by the new scale of 
transactions ; and of this series of discoveries, the second in impor- 
tance in recorded history, California made one of the chief and 
also the earliest. From that time the United States have con- 
tinued to be the first in importance of the sources of gold; and 
were this our only economic relation to the rest of the world, the 
influence of our rise as a nation upon the general well-being must 
be admitted to be direct and powerful in an extraordinary degree. 
k Tobacco, one of our earliest staples for export, has become not 
only an article of great moment in the revenue systems of several 
leading nations, but stands in a peculiar relation as one of the few 
luxuries which enters largely into the consumption of the poorer 
classes of all countries, thus requiring, as it were, a social impor- 
tance far beyond its simple pecuniary value. And of tobacco, the 
United States are now the leading source of supply for England, 
France, and Germany. To turn from this to petroleum, one of our 
newest staple articles of export, and now the third or fourth in 
importance on our list, it may be doubted whether to the majority 
even the ludicrous incidents of the discovery do not continue to be 
more familiar than the reflection that by the timely introduction 
of a cheap and excellent artificial light an immense boon was 
conferred upon a large part of the civilized world. And last 
among those economically important natural products to which 
we shall refer are the cereals. Our capacity for the supply of 
these, although of secondary importance in the markets of other 
countries, has made it possible for us to sustain an increase 
of population which, for years, has been cited as the standard 
example of maximum natural growth. This abundance of cheap 
food has also made it for our interest, simultaneously with this 
rapid natural increase of numbers, to invite from the Old World 



4 ESSAYS 

an immigration on a scale so vast as to constitute in itself an 
economic phenomenon of no mean order, the result being the 
relief of the older countries from a serious, if not dangerous, 
pressure of numbers, by the transfer to our shores of more than 
nine millions of people, or a number equal to the whole population 
of Great Britain at the date of our independence. And the popu- 
lation thus established on our soil, whether native bo~n or of 
immediate foreign extraction, has proved to be no inert mass, but, 
from the start, has been active and resolute to a fault, in improving 
all material advantages and in pushing its way to a place among 
the great powers of the modern world. Mineral resources of 
remarkable variety, and of extent not even yet fully measured, 
together with fortunate conditions of physical geography, have 
seconded these efforts and often enabled us to enter into sharp 
competition with the longer established industries of Europe. To 
excellent natural facilities for communication has been added a 
railway system of seventy-five thousand miles, being little less than 
half the railway mileage of the world, and going far to neutralize 
the disadvantages of great distances, which, in some directions, 
threatened to hamper our growth. A mercantile marine, which 
even in its present depressed condition is not far short of the great- 
est on the ocean, and is of nearly double the magnitude of its next 
competitor, helps in part to connect this vast internal network 
with the general commercial system of the world. So great, how- 
ever, is the volume of our exchanges with other countries, that 
scarcely one-third of it is transported by our own shipping. With 
the mother-country, especially, our commerce has grown, until it 
overshadows that of every other nation with whom she carries on 
a trade either of export or of import. What a growth this has 
been is shown by the fact that the steam-tonnage now annually 
cleared for New York alone from the United Kingdom exceeds 
the total tonnage of ships annually cleared for all parts of the 
world down to the close of our Revolution. 

In the process of development indicated by these few leading 
facts, the United States, by a natural and steady though rapid 
movement, have taken among commercial nations a place not 
lower than the second, and likely soon to become the first, — the 
second or first place it must be remembered, in a changed world, 
and in a scale of magnitudes hardly comparable with those of 



ECONOMIC SCIENCE IN AMERICA 5 

1776. We have advanced to the front among competitors who 
were themselves all rapidly advancing. But, with improved facili- 
ties for intercourse, the economic ties between countries have been 
vastly multiplied and strengthened, and to hold a leading posi- 
tion in commerce now implies a direct connection with the prog- 
ress of others and with their material well-being, immeasurably 
closer than has ever existed before. Every fresh conquest over 
nature made by us belongs to the family of nations also, and every 
loss suffered by us is also their loss. Infinite mutually dependent 
interests unite us with Europe and with the very antipodes. Every 
pulsation in the financial system is felt alike on each side of the 
Atlantic. A crisis in London has its instant counterpart here, and 
the great revulsions which periodically sweep over the commercial 
world may begin, almost as chance may dictate, in New York or 
in Vienna. 

The value of the triumphs of material development achieved 
by the United States is not to be underrated. They represent but 
one side of human progress, but their influence on interests of a 
higher order is immediate and powerful. The world cannot yet 
dispense with the stimulus which the search for wealth gives to 
some of the pursuits and institutions which most elevate and en- 
noble civilized life. Doubtless Carlyle is right when he says that 
" America's battle is yet to fight. . . . Their quantity of cotton, 
dollars, industry, and resources I believe to be almost unspeak- 
able; but I can by no means worship the like of these." But 
these have been one of the great factors in producing whatever 
of progress and hope the world has gained in our age. If not to 
be worshipped, they are still not to be despised, for from them 
comes, as must be admitted, much that is itself worshipful. Even 
our merely material growth may then fairly be a subject of pride, 
so long as we remember that it is itself only the means for higher 
ends. 

Standing in this relation to the general advance in wealth 
which the world has made, it might have been thought in advance 
that the United States would be prompt in investigating the laws 
which govern all economic progress. The philosopher who could 
have foreseen in 1776 the amazing career of the weak and scantily 
peopled colonies which then took their place as an independent 
power, might easily have been persuaded that the new science, 



6 ESSAYS 

then having its birth and treating of " the nature and causes of the 
wealth of nations," would be taken up by this people with 
especial animation and success. " Here," he might have said, 
" is the beginning of an inquiry into the nature and causes of that 
which will chiefly occupy the new nation. Others in their matur- 
ity or decadence may prosecute this inquiry in the hope of dis- 
covering the means of escape from impending evil ; this people 
will pursue it with the enthusiasm of strengthening youth. Success 
in this investigation and a wise application of its results will 
account for the splendid triumphs in the acquisition of material 
wealth, which are to distinguish the first century of independent 
national life." How far the imagined anticipations of our philoso- 
pher have been verified, and the reason for their failure so far as 
they may be found to have failed, is the object of the review on 
which we now enter. 

The condition in which the breaking out of our Revolution 
found the study of economic science in this country is well exem- 
plified by the writings of Franklin. Of all our public men of that 
period he was the one whom we should perhaps most naturally 
expect to find dealing with this class of subjects, and, if not pro- 
foundly investigating the causes of phenomena, at least deriving 
from observation and reflection sound and consistent rules for 
practical guidance. His activity in the political discussions of 
more than half a century, and his natural fondness for every in- 
quiry respecting material well-being, seem to mark him out as the 
American who must deal with political economy if any one did, 
and the one who could rise to the level of the national thought in 
economic speculation, if he did not soar much beyond it. Frank- 
lin wrote upon topics of this class from his twenty-third year, and 
probably wrote as well in his twenty-third year as he ever did. 
The questions of currency then raised in every colony by the 
paper issues of the colonial governments he had occasion to treat 
of at several different times. But the support which he gave to 
issues of that kind rests on no well-defined systematic body of 
opinions; indeed, his discussion of the continental currency, in 
some of his letters, raises questions as to his clearness of percep- 
tion in morals as well as in political economy. He is quoted with 
admiration by writers of the protectionist school, and he might 
equally well be quoted by their opponents. He was in fact a man 



ECONOMIC SCIENCE IN AMERICA 7 

of expedients rather than principles, often sagacious in dealing 
with immediately practical questions, but satisfied with the crudest 
speculations as to the operation of causes in any way remote. His 
economic writings were edited for Mr. Sparks's collection of his 
works by the late Judge Phillips, himself an economist of no mean 
capacity; and the annotations of the editor afford ample evi- 
dence that he found it no easy task to present with respectful 
comment and due admiration the mass of ill-digested reasoning 
placed in his hands. That Franklin read much of the writings 
of others on questions of political economy is not to be inferred 
from his works. Smith's " Wealth of Nations " is cited in a paper 
on the increase of wages in Europe likely to be caused by the 
American Revolution, written shortly after 1780, when Franklin 
was abroad ; but the citation is made to settle a fact, and not to 
further the discussion or elucidation of a principle. 

Of Franklin then it must be said, that he not only did not 
advance the growth of economic science, but that he seems not 
even to have mastered it as it was already developed ; and little 
more can be said for any of our public men or writers during the 
period of Franklin's activity. We find no one well versed in 
economic theory and entering upon speculative inquiries of real 
value until we come to Alexander Hamilton. That great man, 
whose remarkable career was finished at the point when most men 
are just ready for action, was a reader and inquirer in political 
economy in his twentieth year. In his twenty-fifth year, in such 
leisure as the camp of the Revolution afforded, he matured a 
scheme for a Bank of the United States, and became a corre- 
spondent of Morris on that subject. And, finally, at the age of 
thirty-four, he produced, as Secretary of the Treasury, his great 
reports on the Public Credit, on a National Bank, and on Manu- 
factures, the most powerful and comprehensive discussion of the 
national finances ever made under our government, and the sub- 
ject, it may be remembered, of one of Mr. Webster's noblest 
periods. Those reports bear the evidence throughout of much 
reading and reflection upon the experience of nations, and of 
careful meditation on the speculations and theories of previous 
writers. Examination of the report on Manufactures, in particu- 
lar, will show that in some parts of it, in his selection of topics 
and even in the order in which they are marshalled, Hamilton was 



8 ESSAYS 

influenced by his familiarity with Adam Smith. The writings of 
the French economists were probably known to him at this time, 
as they certainly were a few years later, and some of the doctrines 
of this school, as well as Smith's concessions to them, received 
from him a successful refutation. Both the knowledge of eco- 
nomic questions and the power of dealing with them exhibited 
by Hamilton in these discussions warrant us in setting him down 
as a writer who, under other conditions and freed from the press- 
ure of public business, might have been expected to make some 
positive contribution to the development of economic theory. But 
his few crowded years left him little opportunity for such pursuits, 
and it would now be hard to say that he left any impression 
on the thought of the world, by his dealing with this subject. 
His reports have continued to be the arsenal from which the 
advocates of special measures have again and again drawn forth 
weapons now well worn ; but systematic political economy cannot 
be said to owe to him any recognized principle, any discovery in 
method, or indeed any influence save the stimulus which his 
example must always afford to the student of financial history. 
If Hamilton did not permanently influence the economic 
thought of the world, there is certainly no other statesman of 
that period for whom such a distinction can be claimed. Among 
Hamilton's great contemporaries none followed the discussions of 
the new science with more interest than Jefferson and Madison ; 
but neither of these statesmen was comparable to Hamilton in his 
mastery of the subject. Jefferson had that fondness for it which 
he had for all philosophical speculation, kept himself informed as 
to all new publications abroad, was instrumental in bringing some 
of these before the American public, and corresponded with some 
of the leading French economists of his day ; but in his own dis- 
cussions of economic questions it is difficult to find any firm 
ground of logical principle, and impossible to find any addition to 
what had been previously ascertained and better comprehended by 
others. Madison, with interests less diffuse than Jefferson's, had 
a much firmer hold upon this subject. He appears to have fol- 
lowed its current literature with close attention, and to have 
reflected upon principles and to have applied them, with great 
although not uniform force, in his reasoning upon public ques- 
tions. It is interesting to find Madison — and, indeed, Jefferson 



ECONOMIC SCIENCE IN AMERICA 9 

also — giving in an early adhesion to the doctrines of Malthus on 
population, and defending them by arguments from the experience 
of the United States. But Madison could make as little pretension 
as Jefferson to having added any results of original investigation 
to the work of others. His merit was not as an economist, but as 
a statesman who conscientiously prepared himself for the duties 
of public life by following this necessary branch of a statesman's 
studies. Of the other public men of this early period of our 
history we need mention only Robert Morris and Gallatin ; and 
of these eminent practical financiers the latter only has any claim 
to notice in connection with scientific theory. The memorial 
drawn up by him and presented to Congress, in 1832, from the 
Philadelphia Convention in favor of tariff reform, is a full and 
strong statement of the arguments against protection, and exhibits 
familiarity with the results of theoretical discussion, as well as 
with the practical side of the question ; but the complete oblivion 
which now covers the document shows how narrow and temporary 
is the influence to be credited to it. His pamphlet on "The 
Currency and Banking System " is also a comprehensive and 
sound discussion of these topics, but has ceased to be much 
referred to, except for historical purposes. 

Of the great men of the next generation, Mr. Calhoun was 
doubtless well qualified by nature for this field of investigation, 
and displayed a strong inclination to enter upon it; but, unhappily, 
every mental power and every pursuit at last became subservient 
with him to a narrow sectionalism, which finally frustrated all hope 
of sound fruit from a laborious life. The electric power with 
which Mr. Clay acted upon the emotions of men was not coupled 
with any special capacity for the research of principles ; and while 
his name is inseparably connected with the "American system," 
his argumentative defence of that system is practically forgotten, 
— so much easier was it for him to give vogue to an effective 
name, than to give a scientific basis to the thing itself. Mr. Web- 
ster discussed with great power many questions involving general 
principles of political economy, but he never cared to apply his 
intellect to the foundations of the science. Indeed, in one of his 
letters he says : " I give up what is called the ' science of political 
economy.' ... I believe I have recently run over twenty vol- 
umes, from Adam Smith to Professor Dew, of Virginia; and from 



10 ESSAYS 

the whole, if I were to pick out with one hand all the mere truisms, 
and with the other all the doubtful propositions, little would be 
left." Whatever else may be said of this passage, it absolves us 
from the further explanation of Mr. Webster's failure to contribute 
to the world's advancement in economic science. Of the contem- 
poraries of these three great men, the other champions on whose 
words listening senates once hung, in the fierce contest over tariff 
and bank, no name can now be recalled as having any claim to 
connection with the development of the science of which we speak. 
Lowndes, Crawford, Wright, Berrien, McDuffie, Benton, and the 
others may yet shine in our political history, but they are unknown 
in political science. 

And if we examine the roll of statesmen of the generation 
which closes our century, what better success is met ? We find, 
indeed, the names of some men who have skilfully managed inter- 
ests of vast magnitude, and of others, not in great number, who 
have shown a competent scientific knowledge ; but we may 
safely challenge the mention of one who has added to the stock of 
economic principles with which the world was already acquainted, 
or has given any essential assistance in their elucidation. As a 
class our public men have confined themselves, like Franklin, to 
the sagacious application of rules of thumb. So far as they have 
dealt with the science at all, it has been made for them by others ; 
and they have not aided in making it. Indeed, the promise held 
out by Hamilton's great example, of the thorough examination of 
questions in the light of ascertained principles, has seldom been 
fulfilled, even by our highest officers of administration. Few 
things, in fact, are more noticeable in our recent political history 
than the extreme fragility and brevity of the reputations acquired, 
either in administration or in legislation, by most of our public 
men who have assumed to deal with this class of subjects. 

If we turn from the statesmen to the scholars of the United 
States, the result is not more satisfactory. Down to the year 1820 
no American produced any treatise on political economy which the 
world has cared to remember. Such books of that period as come 
to light, upon industrious search in forgotten corners, are crude, 
unsystematic, full of empirical notions, and are now intellectually 
obsolete. The philosophical study of the subject, to which Adam 
Smith gave an impulse abroad, was, in fact, late in making any 



ECONOMIC SCIENCE IN AMERICA II 

public appearance on this side of the Atlantic. The increasing 
interest in it is shown by three editions of the " Wealth of Nations " 
(Philadelphia, 1789; Hartford, 181 1 ; ibid., 1818), and by the re- 
printing of Ricardo's great work (Georgetown, 18 19) only two 
years after its original publication. But when we remember that 
on the other side of the Atlantic this period was marked by the 
appearance of works so important, and in some cases of such last- 
ing influence, as those of Malthus, Say, Ricardo, and Sismondi, 
the poverty of American thought upon the subject is striking, even 
if we allow, as we must, for the infancy of the country and the 
consequent small number of its literary class. In the twenty years 
which followed the period of which we have just spoken, a toler- 
ably rapid succession of treatises by American authors was given 
to the public. Raymond (1820) brought to the discussion zeal and 
ingenuity, but such looseness of method and want of precision of 
ideas as to defeat his efforts and destroy the value of his work, — 
which, indeed, from its confusion of definition and want of system, 
seems a late growth of the generation which preceded Smith, 
rather than one of that which followed him. Alexander H. 
Everett, fresh from the influences of a long residence in Europe, 
and of personal intercourse with some of the leading economists 
of the world, published (1822) an answer to the essay of Malthus 
on Population, which holds a place among the best of the many 
attempts made in this direction ; but his dialectic skill was not able 
even to supply the opponents of the Malthusian doctrine with a 
common standing ground, and still less to prevent the doctrine 
from being accepted in its essentials by the great majority of 
economists who have followed, and even by many who imagine 
that they reject it. Dr. Cooper, of South Carolina, issued a treat- 
ise (1826), of which McCulloch says that, "though not written in 
a very philosophical spirit, it is the best of the American works on 
political economy that we have met with," — an encomium meas- 
ured with judicious care. Dr. Cooper's chief success, in fact, was in 
reproducing in systematic form the results attained by the English 
economists, with whose works he was well acquainted ; but he did 
nothing in original speculation. Willard Phillips produced a treat- 
ise (1828) in which, treating the whole structure of Malthus and 
Ricardo as unsound, he sought to take up the subject where Adam 
Smith had left it. He treated it with an abundant knowledge of 



12 ESSAYS 

industrial and commercial facts, and with a mind well trained for 
speculative inquiry ; but it was complained, even by a friendly con- 
temporary critic, that he reared nothing in place of that which he 
sought to remove. Rae's book (1834) has been pronounced by 
high authority to be a valuable discussion of the subject of produc- 
tion ; but as the work of a Scotchman settled in Canada, and origi- 
nally intended for publication abroad, we can hardly count it as 
an American contribution. President Way land's book (1837) is 
the only general treatise of the period which can fairly be said to 
have survived to our day ; and this, it must be admitted, owes 
whatever value it has to its manner of presenting for easy compre- 
hension some of the leading English doctrines, — of which, how- 
ever, it may be doubted whether the author ever fully recognized 
the bearing. Vethake's treatise (1838) is now little known, its 
more valuable portion having served its purpose, like the works of 
Cooper and Wayland, of bringing before our public some of the 
results, at that time unfamiliar, which had been reached by writers 
not then well understood in this country. Other writers of this 
period, like Dew, Newman, Tucker, and Potter, can be dismissed 
even more summarily, so transient was their influence and so com- 
pletely forgotten are their works. 

The years which followed from 1840 down to the war for the 
Union were for natural reasons much less prolific of works on 
political economy than the period just noticed. The stimulus 
given to the study of the science by the extraordinary advances 
made in it by the great English investigators had ceased to be 
active; questions of currency, as we shall presently see, had 
fallen into a subordinate rank ; the tariff question, after a furious 
party struggle in which all considerations of political science were 
lost sight of, seemed to have been settled ; and the great sectional 
controversy began to fill all minds, to the exclusion of every other 
public question. A few text-books appeared, recasting familiar 
material; as, for example, the well-known treatise of Professor 
Bowen (1856), in which he threw into connected form a long series 
of articles and lectures produced by him in the preceding ten 
years, and Bascom's convenient resume of economic theory (1859). 
To these we must add Stephen Colwell's work on " The Ways and 
Means of Payment" (1859), the production of an author who had 
few equals as regards his acquaintance with economic literature, 



ECONOMIC SCIENCE IN AMERICA 1 3 

but who in this, his chief work, appears to have been led into 
unprofitable subtleties, which have failed to influence appreciably 
the opinions or studies of others. Beyond these works, however, 
— and omitting for the present a writer whom we must notice 
more at length further on, — our literature now has little to show 
in this department except pamphlets and occasional essays of 
limited interest, for the years in which the wonderful phenomena 
of the California discoveries were occurring in our own country. 

In the period which includes and follows the war we have a few 
works like that of the late Amasa Walker (1866), with its earnest 
but not always conclusive discussions of currency, and the vigorous 
treatise by Professor Perry (1866), — both designed for use as 
manuals, and claiming but little attention as statements of original 
thought. In general it must be said of the last ten years, that 
while they have witnessed a marked and salutary revival of 
interest in economic discussion, the most absorbing questions 
which have caused this revival have been quite too rudimentary to 
lead to fresh development of principle. Whether we shall have 
more paper, or shall return to specie, are questions calling not for 
research so much as for skill and force in rhetorical treatment, 
which may carry axiomatic truths into unwilling or otherwise unre- 
ceptive minds. It is true that the question whether our fiscal 
policy should look to continued protection or to ultimate freedom 
of trade involves more really controversial matter ; but this has 
been so far overshadowed and complicated by the question of 
currency, that it neither has produced nor seems to us likely 
to produce for some time to come any marked originality of 
investigation. 

It might perhaps have been enough for our purpose, if, instead 
of passing in review this series of American writers on political 
economy, we had simply called attention to the fact that, with few 
exceptions, the works produced in the United States have been 
prepared as text-books by authors engaged in college instruction, 
and therefore chiefly interested in bringing principles previously 
worked out by others within the easy comprehension of under- 
graduate students. The success with which this work has often 
been done and its value, we shall not question ; but clearly it is 
not by such means that discoveries in abstract science are likely to 
be made or to be announced to the world. It should occasion no 



14 ESSAYS 

surprise, therefore, that of the considerable list of American 
writers on the subject, so few have produced any impression out 
of our own country, or have been able even at home to give to the 
study any strong impulse. Not only has no American school of 
writers on political economy been established, if we except that 
which we are about to notice, but no recognized contribution to the 
development of the science can be pointed out in any way com- 
parable to those made by the French writers, or to those which the 
Germans are now making. 

The writer to whom we have referred as offering in some 
respects a possible exception to these general remarks is Mr. 
Henry C. Carey. It cannot be said that Mr. Carey has not 
engaged attention outside of his own country, for his works have 
been translated and circulated in nearly every important language 
of Europe, and Mr. Mill on several occasions pays him the dis- 
tinguished tribute of singling him out in an especial manner from 
a throng of opponents. Nor can it be said that he has won his 
place by following others, for his system aims at nothing less than 
revolution in the leading doctrines of political economy, and he 
certainly bids fair to stand next to Malthus and Ricardo as a pro- 
voker of controversy. This exceptional position has been attained 
as the result of a long and laborious career as a writer. Mr. 
Carey's first publication, in which he appears as an advocate of 
free-trade, with an economic theory based on a new doctrine of 
value, dates from 1835. His denial of Ricardo's doctrine as to the 
law of production from land and his conversion to the theory of 
protection followed a dozen years later. The final elaboration of 
his system in opposition to what he is fond of calling the British 
school appeared ten years later still, in 1858 ; and hardly a year 
has passed since without some addition to the long line of his 
works on this class of subjects. This series of publications has 
had a distinct and not inconsiderable effect. Bastiat not only 
borrowed Carey's law of value and presented it in a brilliant para- 
phrase, but seems to show Carey's influence throughout his eager 
search for harmonies in the economic world. In Germany, where 
the way was no doubt prepared for him by the labors of Frederic 
List, Mr. Carey has found a large class of readers, whose numbers 
are explained by Dr. Diihring of Berlin, the most active German 
writer of this school, by pointing to the American author's early 



ECONOMIC SCIENCE IN AMERICA 1 5 

sympathy with the Germans and his prediction of their intellectual 
leadership of the world ; although a more substantial ground of 
explanation might be found in his more than German readiness to 
refer to the coordinating power of the state, as a specific for 
social or economic discords. 

But while we may admit that the system elaborated by our 
countryman is likely to be, as Duhring says, "a ferment of the 
strongest kind " in the discussions of this generation, we must not 
forget that to lead a school is not necessarily making a contribu- 
tion to the science. Not much of Mr. Carey's work, we are con- 
fident, will be found wrought into the political economy of the 
future. His doctrine of value gives epigrammatic form to some 
important general truths, but does not supersede the usual con- 
ception of value as the ratio of exchange or purchasing power of 
commodities, or enable us to dispense with the use of that con- 
ception in dealing with a wide range of questions, both theoretical 
and practical. His doctrine as to the law of production from land, 
which is presented in fundamental contradiction of the English 
school, is chiefly a statement as to historical development, which 
does not touch the essential point of Ricardo's theory ; and while 
he denies the whole of that theory and the law of Malthus as to 
increase of population, his reliance upon a conjectured physiologi- 
cal law as an ultimate limit to the increase of numbers, shows the 
difficulty which he has found in avoiding as a logical conclusion 
the tendency to increasing pressure upon the means of subsistence 
pointed out by those writers. And it is upon his speculations as 
to value, production from land, and population that, as we appre- 
hend, his claims to be regarded as a permanent contributor to the 
science would be rested, — not upon his later discussions of pro- 
tection, the major part of which follows from the three lines of 
speculation just named, nor upon his theorizing as to money, in 
which his priority might be disputed by a series of writers, from 
John Law down. That Mr. Carey, by his ardent attack, compels 
a wholesome revision of positions and arguments there is no ques- 
tion ; that he has checked some incautious generalizing we have 
no doubt; but that he has overturned any previously accepted 
principle of leading importance, still more that he has established 
any new and valuable principle originated by himself, is a claim 
which, in our judgment, cannot be made good. 



16 ESSAYS 

In thus recognizing Mr. Carey's position as a writer of excep- 
tional importance, we are confirmed by observing that he is the 
only American author noticed by Dr. Roscher in his exhaustive 
" History of National Economy in Germany." But it must be 
admitted, we think, that Mr. Carey's following, in our own 
country, has had a more local character than might have been 
expected from his wide reputation. The work of E. Peshine 
Smith (1868), Dr. William Elder's "Questions of the Day" 
(1871), and Professor Thompson's " Social Science" (1875) are 
representative, not only of the views of his school, but almost of 
its geographical limits in the United States. The conclusion at 
which we have arrived, however, as to Mr. Carey's own position 
with respect to the development of economic science, frees us 
from the necessity of considering more particularly those writers 
who have followed but have not advanced beyond him. 1 

The general result then to which, as we believe, a sober exami- 
nation of the case must lead any candid inquirer, is, that the 
United States have, thus far, done nothing toward developing 
the theory of political economy, notwithstanding their vast and 
immediate interest in its practical applications. It is not an 
agreeable duty to declare a conclusion so little nattering to 
patriotic sentiment; but to arrive at it as a truth forced upon 
the mind by the history of economic science is still less agreeable. 
And what explanation, it will be asked, is to be given for a failure 
apparently so much at variance with what our material condition, 
the general intelligence of our people, and the growth of intel- 
lectual activity among us, might lead the inquirer to expect ? The 
answer to this question will be easier, if we briefly consider the 
circumstances under which one of the leading public questions 
having an economic bearing has been discussed and acted upon 
in this country. 

The question of paper currency, when it first came before the 
people of the United States for settlement under the present Con- 

1 It is impossible to make any serious mention of Mr. Greeley as a writer on political 
economy, although his name is sometimes included in a full catalogue of Mr. Carey's 
school. And we have not included the name of Mr. Colwell, because, while he, no doubt, 
agreed with Mr. Carey in many points, we observe that in a note to the translation of 
List's "National System of Political Economy," p. 335, he more than intimated dissent 
from Mr. Carey's theory of rent ; and Mr. Carey's system, with that theory struck out, 
would not be recognizable by its author. 



ECONOMIC SCIENCE IN AMERICA 17 

stitution, in 1 790-1 791, was already complicated in a manner which 
made its thorough investigation doubtful. Whether such paper 
should be issued at all, whether it should be regulated by the 
general government or the states, and whether the proposed 
national bank should control the paper issues of the country, or 
should be content with simply pouring its own into the general 
mass, were questions the decision of which was in a manner fore- 
stalled by the existence of banks of issue established several years 
before under state authority, and not easily disturbed by the new 
government. And the approach to the fundamental question as 
to bank paper was still further embarrassed by the political turn 
which the discussion took in its early stages. The advocates of a 
liberal construction of the Constitution, and those of a strict con- 
struction, arrayed their forces for battle over this question as soon 
as it appeared. Nothing, indeed, could be more natural ; but 
nothing could be more unfortunate for the proper settlement of 
an economic problem. All scientific questions were made subor- 
dinate to the political question at the outset. The party who 
dreaded to see the natural government too strong were committed 
in advance, in opposition to a measure which for them was part 
of a general political system, and in large sections of the country 
hostility to the bank became hostility to banking. And the 
division of opinion upon this line, rather than upon abstract 
principle, was promoted by the supposed opposition of interests 
between the commercial states and the agricultural. Of thirty- 
nine votes for the bill chartering the first Bank of the United 
States, all but six were from states north of the Maryland line ; 
of the twenty votes against the bill, all but one were from states 
south of that line. How far the political side of the question of 
banking overshadowed the scientific is clear from the manner in 
which it was discussed by Mr. Jefferson, from whom one of the 
great parties took its tone for years. That statesman's treatment 
of the question of currency, and, indeed, of other economic ques- 
tions of which the relations happened to be political, would to-day 
be universally recognized as beneath the level of both his intellect 
and his knowledge. His intense democracy, and his extreme 
dread of any proposition based on English models or English 
opinions, incapacitated him for any genuine discussion of this 
subject in its larger aspects. And to what length the ignorant 



18 ESSAYS 

bigotry of many of his followers carried the hostility to banks, 
which was instinctive with him, the political history of our first 
half-century amply testifies. 

The prudence and good judgment with which the first Bank 
of the United States was conducted are now seldom questioned : 
and the real service which it rendered, in its twenty years of 
existence, toward giving a stable foundation for our finances, at a 
time when the state banks and their issues were in actual chaos, 
is not more doubtful. But the bank owed its existence to the 
Federal party, and with the downfall of that party the renewal 
of its charter became impossible. Late in the War of 1 812, an 
empty treasury brought the government of the day to the support 
of a new bank charter, as an expedient of the moment. Banks, 
said Mr. Webster, in sober admonition, cannot give the means 
of supporting an expensive war. " They are useful to the state 
in their proper place and sphere, but they are not sources of 
national income. The streams of revenue must flow from deeper 
fountains." But so urgent was the demand for a bank, on grounds 
of merely temporary policy, that Mr. Madison, who had opposed 
the charter of the first Bank of the United States, vetoed, as 
dilatory, one bill chartering the new bank, because it required 
the institution to begin on the basis of specie payments. Happily, 
the return of peace settled this weighty question for us, and the 
second Bank of the United States was chartered, to begin as a 
specie-paying bank, on the first day of January, 1817. 

But whatever influence the new Bank of the United States 
might have had in directing the public mind to broader views 
of the question of currency, had it been left to itself and had its 
management continued to be sound, its circumstances did not 
allow such influence to be exerted by it. Political hostility was 
excited against it, and, six years before the expiration of its 
charter, war was formally declared against it by President 
Jackson. We, of the present generation, are in some respects 
losers from the total and probably final disappearance of that 
personal loyalty to great leaders, which marked our politics forty 
years ago and gave to them a glow of generous enthusiasm ; but 
in some respects we are also gainers. The overwhelming in- 
dividuality of one man is not likely again to convert a high 
question of economic policy into a mere struggle between " Jack- 



ECONOMIC SCIENCE IN AMERICA 19 

son and the bank," in which the rival clamors of personal ad- 
herents and personal foes shall drown all considerations of 
scientific or political principle. Such, however, was the ignoble 
character of the contest which led to the final overthrow of the 
second Bank of the United States. The financial revulsion which 
followed that contest, and was in part its natural consequence, 
established for years in the minds of a great political party the 
notion, — it could hardly be called an opinion, — that paper cur- 
rency of any sort is sure to work ruin. Under the domination of 
this party the general government in 1846 made specie its only 
currency, and left the paper, the currency of the people in three- 
quarters of the states, to take care of itself. That this measure for 
the protection of the Treasury was judicious, supposing it to be 
settled that the paper was to remain free from all control, few are 
now disposed to deny; but it involved an abdication of power 
over the part of the circulation which was of immediate importance 
to the mass of the community, and a confession of the insolubility 
of a great public question, which hardly has its parallel. 

The effect produced on our statesmen by thus drawing a line 
which left this whole subject in the exclusive province of state 
legislation, was disastrous. From 1846 to 1862 the study or dis- 
cussion of currency and finance formed no part of the training of 
men for national politics. In the legislatures of the states 
questions of this class were dealt with by men of inferior order, 
or by those who were only anxious to make their mark and go up 
into a broader field; but they had ceased to be national questions 
which could repay the political aspirants to national office for any 
considerable expenditure of time or thought. Congress had 
nothing to do with the currency, except to settle the weight and 
fineness of the coin, and government finance resolved itself into 
paying all demands in gold from a treasury which generally over- 
flowed, and borrowing upon easy credit in an exceptional case of 
difficulty. It is not surprising that, when the war for the Union 
compelled the government to deal comprehensively and at short 
notice with questions of finance and currency in their most 
threatening form and on a gigantic scale, we had no leading man 
in public life who could speak upon them authoritatively or com- 
mand general attention. The bald confessions of unfamiliarity with 
what had become the vital topics of the hour are a humiliating 



20 ESSAYS 

part of the record ; but what other outcome from our public his- 
tory was possible? We need not characterize in detail the con- 
sequences of this misfortune. Victory came in season to avert 
the ruin with which the gross violation of the plainest economic 
principles threatened the nation, and the task of repairing the 
mischief and returning to specie was set before us. For eight 
years, however, it was overshadowed by the business of Southern 
reconstruction, and was habitually treated by men in public life 
as a topic of the second order, which could wait for settlement 
at a more convenient season, and as to which perhaps one need 
not yet make up his mind. The financial catastrophe of 1873 
suddenly brought the currency question to the front, as one which 
must be answered if we would secure the return of stable pros- 
perity ; and the number of men, either in legislative or in execu- 
tive position, who were then able to show that they had fairly 
investigated it and thought it out in the light of scientific prin- 
ciples, might almost be counted upon the fingers. The discus- 
sions which followed showed that the mass of public men were 
dealing with it, either with the audacity of unconscious ignorance 
or with the timidity of that which is conscious. The published 
debates exhibit our Congress for two sessions laboring painfully 
with sophisms which other countries disposed of half a century 
ago, and finally resorting to action which fails to be mischievous 
only because it has thus far been nugatory. The majority still 
drift upon the sea of doubt, without compass and without any 
directing impulse save such as may come from the veering gusts 
of popular feeling ; and it is with this as the prevailing condition 
of opinion among the majority of our most conspicuous leaders 
on both sides, that we finish the first century of our national 
existence. 

But that our statesmen have been incapable of taking any con- 
sistent action upon the currency question, and that every material 
interest is thus placed at the mercy of chance^ is not, to our mind, 
the most serious evil resulting from this state of things. What 
appears to us most threatening is the sceptical turn thus given to 
opinion among the mass of our people. What is the ordinary 
voter to think of a subject which he himself finds dark, and as to 
which those whose opinion he is apt to follow either talk anti- 
quated nonsense to him, or tell him that nothing is settled ? Add 



ECONOMIC SCIENCE IN AMERICA 21 

to this the fact that one-half of the present political generation 
have come upon the stage since we abandoned specie, and 
have had no other experience to enlighten them, and we cannot 
wonder that the currency seems to the mass a subject on which 
mankind have learned nothing, and that the plainest proposition 
of reason confirmed by history may any day be talked about as 
"an open question." The scepticism of searching inquiry is not 
to be feared ; but the incredulity of ignorance multiplies tenfold 
the difficulty of the task of restoring the financial health of the 
nation. 

In the case of the currency question, then, it appears that the 
subject from the first came before our public men in a form which 
seemed to make its political bearings too important to be sub- 
ordinated to any scientific treatment. The same might be said of 
the tariff discussion, which, apart from its inevitable complication 
with individual interests, has never failed also to present itself in 
such sectional or party relations as to make its settlement turn 
largely upon far other considerations than those of general prin- 
ciple. Whether this complication has been the result of some 
untoward chance, or has come from the errors of our statesmen 
themselves, we need not now inquire ; in either case the effect is 
the same. Under our form of government these two questions of 
currency and tariff cover most of the space within which those 
charged with national affairs have been called upon to investigate 
and apply economic laws. No doubt, important topics lie within the 
domain of state legislation ; but there the adoption of any general 
theory, however sound, has been impracticable from the nature of 
the case. It is a part of the price which we necessarily pay for 
the advantages of our federal system, that under it questions of 
essentially general interest, such as those of taxation, education, or 
poor-relief, are classed as merely local, and are therefore not sub- 
ject to any one controlling authority. With the two great ques- 
tions of national economy, then, prejudged or inextricably bound 
up with other issues, it is hardly surprising that our statesmen 
should have neglected the investigation of this subject, so that it 
is to-day easier to find well-read economists among our men of 
business than among public men of equally good general educa- 
tion, although the inducement to such pursuits should not properly 
be any stronger in one case than in the other. 



22 ESSAYS 

It is necessary, however, to look deeper than this for the reason 
of the general sterility of American thought upon this subject, and 
the failure of our scholars as well as statesmen to contribute our 
share in the progress made by the world. For the explanation 
we must look to the causes which have made the progress of the 
United States so slow in philosophy, in the pure mathematics, 
and in abstract science generally, in philology, in the more recon- 
dite historical investigations, and in the higher generalizations in 
physics. Our position as a nation charged with the business of 
subduing a new world, and the rapid material development which 
has attended our success in this work, have given to our life for 
the greater part of the century an intensely practical aspect. 
Practical objects, and pursuits which are believed to be practical, 
have occupied the first place, almost as a necessity of our external 
conditions. It has been well remarked that some of our best 
achievements in natural sciences have been in those directions in 
which the promise of some material gain has afforded the stimu- 
lus, — as, for example, in economic geology, to which so powerful 
an impulse has been given by our eagerness to know the resources 
offered by our vast territory. Under such an influence as this it 
is but natural that the moral sciences should develop slowly. Nor 
could we expect that among these sciences political economy 
should outstrip the others. Broad as are its applications in the 
actual affairs of life, it is mastered and fruitfully studied best as an 
abstract inquiry. The thorough student soon finds that it is nec- 
essarily an investigation as to the direction which human volitions 
will take under given conditions, and that for its successful prose- 
cution he must first direct his attention to the mind itself, finding 
in the complex phenomena of society the test but not the grounds 
for his conclusions. Especially has this been the necessary char- 
acter of the study during the last century, while the work to be 
done was that of determining the fundamental principles of the 
science. Such a pursuit, at any rate in the stage from which it 
has hardly yet emerged, must needs appear remote from the pres- 
ent interests of a nation like ours, and could not offer an attractive 
field for scholars under the influence of a young and vigorous 
national life. Thus it has happened that not a few of our inquirers 
have either been unwilling to recognize this essentially abstract 
character of the investigation, and so have vainly sought to re- 



ECONOMIC SCIENCE IN AMERICA 23 

model the science, or else have strained its conclusions by the 
attempt to give them a practical bearing in advance of what their 
development would allow. In either case the wrong road has 
been taken, and the result has been failure and disappointment. 
Hence, too, the occasional aspirations for an American political 
economy, or for a peculiarly national economy under any name, 
ending in nothing but fresh proof of the impossibility of stating 
the application of any scientific law under special conditions, 
until the nature of the law has first been thoroughly investigated, 
abstraction being made of all accidents of time, place, or disturb- 
ing influences. 

Indeed, the strongly practical direction given to every pursuit 
in American life has not only served to turn our statesmen and 
scholars away from work in the field of political economy, but 
has also given a marked character to such work as they have 
done in that field. In the application of settled or accepted prin- 
ciples to special questions, particularly to questions of importance 
in politics, many of our writers have shown great skill. Examples 
of this kind of success in a narrowed field of definite practical 
relations may be found in the writings of Hamilton and Gallatin 
already referred to, in Henry Lee's report written in 1827 for the 
Boston committee in opposition to an increase of duties, in the 
valuable reports of Mr. Wells on the revenue system, in E. B. 
Bigelow's strong presentation of the protectionist argument, and 
in Grosvenor 7 ^ " Application , of the crucial test, ^ 1 Does Protection 
Protect? " It is hardly too much to say that our best work is 
to be found in our pamphlets and occasional essays, and not in 
our systematic treatises, so powerful has been the stimulus of 
practical objects, and so weak the inducements to abstract philo- 
sophical inquiry. To the same influence must we ascribe the 
exceptional success sometimes attained in statistical inquiry, from 
the famous report of John Quincy Adams in 1821 on weights and 
measures, to some important discussions by Dr. Jarvis, and the 
admirable work done by General Walker on the census of 1870. 

The fact must be taken into account, moreover, that deficiency 
in our comprehension of scientific reasoning and conclusions is 
perhaps less readily realized in political economy than in any 
other science. That its vocabulary is drawn from the language of 
popular discourse, and is therefore peculiarly liable to equivocal 



24 ESSAYS 

use and consequent vitiation of the whole process of reasoning, 
unless strictly guarded, has not only been an abundant source of 
misconception and error among economists themselves, but causes 
those who are unfamiliar with the subject to think that they have 
mastered its terms long before they can fairly claim any such 
mastery. The conceptions with which political economy deals 
are also subjects of everyday contemplation, on which every one 
must needs reason more or less, and as to the bearing of which 
in their broad scientific relations self-deception is peculiarly easy. 
The senator who calmly announced a couple of years ago that he 
had given his leisure for an entire fortnight to the currency ques- 
tion, and had thus been enabled to sound its depths, presented, 
after all, only an egregious type of the difficulty with which in 
this subject one acquires the knowledge that he knows nothing. 
This does not spring from any peculiar obscurity to be found in 
the subject itself, but from the fact that in dealing with it the 
mind is apt to begin with the tendency to misapprehension to 
which we have referred, which must first be overcome ; just as 
the Copernican theory had to make its way against the supposed 
ability of every man to determine its falsity by the seeming evi- 
dence of his own eyes. And while this is not a peculiarity of the 
study of political economy in our own country or our own lan- 
guage, but everywhere impedes its progress, it is easy to say that 
among a people who are predisposed to neglect, or to examine 
only superficially, whatever does not offer directly practical re- 
sults, a science which under the most favorable circumstances is 
subject to such embarrassment, must lend itself with especial 
readiness to the prevailing disposition. Americans are disposed 
to neglect the higher mathematics as unpractical ; but they do not 
imagine that they understand the subject. Political economy they 
are disposed to neglect for the same reason, and all the more 
because they flatter themselves that they already have it at 
command. 

The failure of the American mind to aid in the development 
of political economy is not then necessarily the result of any lack 
of original adaptation, but a natural effect of our environment. 
And we must observe that while material conditions have thus led 
to the neglect of the science, they have also led our people, schol- 
ars as well as others, into some serious misconceptions as to the 



ECONOMIC SCIENCE IN AMERICA 25 

direct bearing of economic laws. From our holding the position, 
unique among the great powers, of a people developing a rich 
and virgin territory, the conclusion often seems to be drawn that 
if the operation of such laws be not actually suspended in the 
United States, they can at any rate be disregarded with compara- 
tive safety. Few men outside of Congress or off the political 
stump will maintain the absurdity that for a new country like ours 
there is a different set of such laws from those which obtain in 
the Old World; but there is an unquestionably great amount of 
mischief done by the knowledge that the lusty growth of the 
nation will repair the injuries caused by economic blunders. 
Whatever follies our statesmen commit, the bounty of nature and 
the rapid increase of numbers incident to this stage of our growth 
soon cure the evil; its traces are soon overgrown, and we seem 
to ourselves to have suffered nothing. " Are we not richer and 
our states more populous than ever ? " it is asked ; " how then 
can we be said to have lost ? " And it is not surprising that the 
sense of risk to be incurred by the mistakes of ignorance should 
be weakened, when it is found by experience that few such mis- 
takes can bring our national expansion to an actual stop. " Where 
the concerns of a nation are conducted in a deep, strong, favor- 
able current of the national energies and impulses," writes a 
critic in this review of the last generation, "progress may be 
made, notwithstanding the mismanagement of the sails, oars, 
and rudder. This is precisely and preeminently the case in the 
United States, where the spontaneous, productive, onward ener- 
gies are in greater activity than in any other country." The idea 
thus frankly avowed, that the management of our resources is of 
little account, so long as we find ourselves sweeping along with 
the current of growth, has been for years the habitual consolation 
of our public men, if not an article of their faith. That it easily 
leads to indifference as to the monitions of economic law is suffi- 
ciently obvious. 

How complete our disregard of economic law has been, and 
how little we owe our brilliant advance in wealth and power to 
the wisdom with which we have used our fortunate position, may 
easily be seen. The manner in which the currency, the life-blood 
of industrial circulation, has from the first been left practically 
to shift for itself has already been noticed. As a consequence 



26 ESSAYS 

there is no evil incident to a vicious currency, from the inability 
to procure the means of exchange for daily transactions on the 
one hand, to the wildest abuse of depreciated paper on the other, 
to which our body politic has not been subjected. And that the 
vigor of youth has enabled it to survive such disorders and even 
to recover its thriving condition has only seemed to give fresh 
encouragement to rash experiments on its endurance. In the 
matter of protection to manufactures neither protectionist nor 
free-trader would be willing to take the responsibility for the 
general result ; for in fact neither has been able to secure adhe- 
rence to his system. Six radical changes of our customs tariff, 
six reversals of policy, have occurred in the last sixty years. The 
present tariff, dating from 1861, already approaches the extreme 
of longevity, and, if we may judge from the past, must soon fol- 
low its predecessors, each of whom once appeared as strong and 
as firmly established as itself. In these successive revolutions we 
have seen industries artificially excited to a premature and un- 
healthy activity, and we have seen them laid waste by the 
withdrawal of the stimulus. Who can measure the misdirected 
labor, the destroyed capital, to repair which we have fallen back 
after each change of tariff upon those natural resources which no 
folly of management could exhaust ! If we turn from the tariff 
to our internal taxation, where the adoption of sound principles 
has rarely been embarrassed by sectional or political considera- 
tions, the state of things is still more extraordinary. Down to the 
year 1861 the United States appear to have learned nothing as to 
taxation. Their burdens were generally too light to cause serious 
uneasiness, except in some cities, and the average legislature is 
tolerably well steeled against the complaints of city interests. 
Since the year 1861 the rapid increase of taxes in every form 
has attracted the attention of our people, but they are not yet 
sensible that their methods of taxation are antiquated and the 
machinery inefficient, that their systems lead to extraordinary 
inequalities, and often rest upon theories which fail of being 
ridiculous only because of their flagrant injustice. Ingenuity in 
preventing the escape of any taxable person or thing has been 
carried to a high point; the art of adjusting the burden so that 
it may be most easily borne has never been studied by any state 
legislature or by Congress. That our people have been able to 



ECONOMIC SCIENCE IN AMERICA 27 

endure this neglect of one of the first duties of good government, 
is due solely to the abundance of their resources, which for the 
present are able to withstand the effects of such waste by taxa- 
tion as, in a country with lower profits, would be a serious check 
upon industry. Here, again, we rely for impunity on the rude 
health of youth. And as a final illustration of our easy-going 
defiance of sound principle, we may cite the continuance of slav- 
ery as the industrial system of the Southern states, until its un- 
expected destruction by war. Nothing can be more certain than 
that slavery was an economic blunder of the first magnitude. It 
notoriously stunted the social development of the communities 
where it existed, checked all tendency to diversification of em- 
ployments by discouraging all pursuits except those least ad- 
vanced, and craved, for its successful working, constant transfer 
of its exhausting cultivation to fresh soil. Leaving out of view 
its moral aspect, there can be no doubt that slavery, economically 
considered, was the most efficient system yet seen for simply 
taking the cream from productive powers which under wise 
management are of unlimited duration. What this perseverance 
in a wasteful use of our resources has cost us, directly and indi- 
rectly, may be partly seen by comparing the splendid natural 
advantages of the Southern states with their present impoverished 
condition. 

It may doubtless be said that we are not the only people 
who in the past century have committed errors of this kind and 
on a great scale. But we are the only people who with a light 
heart have trusted to the energy of growth to insure us against 
the effects of present mistake, and have therefore steadily neg- 
lected to cultivate one of the most important branches of the 
science of government. As a consequence, we find ourselves 
to-day absolutely incapable of following out, for example, such a 
firm and judicious course of management as that by which France 
is reestablishing her finances on a solid basis, after a calamity 
in which all but the name of the French nation seemed to have 
disappeared. Not forced like others to count closely with our 
resources, we have in effect forgotten how to count with them at 
all, and are every day confessing our inability to deal with a prac- 
tical problem, which has been promptly answered by others, far 
less favored, either in material or political conditions, than our- 



28 ESSAYS 

selves. That under such circumstances we should have added 
nothing to the world's knowledge of political economy is not 
surprising. The surroundings have not been incompatible with 
the prosecution of such a study, but they have not been such as 
to promote it. For that purpose something more is needed than 
the mere presence of great resources and of rapidly increasing 
wealth. The profound significance of the investigation as bear- 
ing upon the right use of resources must be realized, as it has not 
been among us, before we can expect that it will be pursued with 
much effect. Elsewhere this lesson has been impressed upon 
statesmen and scholars by the sternness of nature or the approach 
to the limits of her bounty, or by the necessity of dealing with 
the consequences of generations of misrule. But it is a lesson 
no more easily learned by a nation in the full luxuriance and 
strength of its early growth, than is that of obedience to the laws 
of physical health in the first flush of youth. 

As the result of our failure to reckon closely with forces which 
will finally assert their presence, we find ourselves, at the close of 
our first century, falling manifestly short of the development to 
which our exuberant vitality might easily have carried us. In 
every case it was with seeming impunity that we offended against 
the laws of our well-being ; but as the consequence of the whole, 
our statisticians are now accounting for missing millions of popu- 
lation, and for the slackening of the growth of wealth. The youth 
to which we owe our power of ready recovery from the effects of 
all transgressions is also passing away, and it is with a sort of 
angry surprise that our people note their increasing sensitiveness 
to the penalties with which economic error is visited. This leads 
us to the remark, in conclusion, that most of the conditions to 
which we have ascribed the failure of the United States to con- 
tribute to the progress of political economy, being incident to the 
earlier stages of national life, may henceforth be expected to act 
with diminishing force. The period of the most rapid develop- 
ment of wealth once passed, we may expect the practical pursuits 
of life, or those which now seem to be such, to become less absorb- 
ing, and the tendency to enter upon deeper and more abstract inves- 
tigations to strengthen. Already in our older states, which are 
farthest removed from the special conditions which characterize 
the United States as a whole, we may trace the effects of this 



ECONOMIC SCIENCE IN AMERICA 29 

tendency in their increased devotion to sound learning and the arts 
for which the newer states, still in the hurry of swift growth, seem 
to have little leisure. As this movement strengthens, we may 
expect to see the moral sciences generally rising towards that pro- 
portionate development with respect to physical science which 
obtains in older countries, and among the moral sciences political 
economy advancing at least as rapidly as any. To this we shall be 
driven by material considerations as powerful as those which have 
thus far restrained our progress in this subject. As our condition 
approaches more and more to that of old countries, our ability to 
rely upon the increasing abundance of our resources to cure all 
mistakes will disappear, and the mistakes themselves will become 
obviously costly and formidable. In our case, indeed, they may 
easily become more formidable in their consequences than else- 
where ; for in the coming century an economic blunder in the 
United States will be a blunder on a far more portentous scale 
than those of the past, and will work out its consequences among 
political elements which will admit of no trifling. Already our 
public men are appalled by the responsibility of answering such a 
question as is set them by the currency. But in such a country as 
we may reasonably believe this will be fifty years hence, and with 
the dangerous forces now growing within our democracy fairly 
developed, such a question will be for the men or the party to 
whom it is offered for answer a very Sphinx's riddle, and failure 
to solve it will mean political death. It will then no longer be 
possible for statesmen or scholars to ignore or neglect those eco- 
nomic laws which determine the consequences of our actions. The 
same unfailing operation of historical causes, which in other 
countries has led to every great step yet made in the progress of 
economic thought, will produce its effect here. This action may 
be hastened by the shock of some crisis in national affairs ; but if 
not, the same result must come in the fulness of time. The regu- 
lar course of our development must, at a point not far distant, dis- 
close to us an imperious necessity for investigating the laws of 
material wealth ; and that point being reached, we may confidently 
expect that the United States will no longer fail to contribute their 
due share to the advancement of this branch of knowledge. 



THE REACTION IN POLITICAL ECONOMY 1 

Sixteen years ago, Professor Cairnes was guided, in choosing 
the subject for his opening lecture at University College, London, 
by seeing the signs of a belief among the educated public that 
"political economy had ceased to be a fruitful speculation." Six 
years later, it was noted that in the speeches at the Adam Smith 
Centennial, celebrated by the English Political Economy Club, 
there were indications that a similar sense of frustration and of 
limited hope as to the future had made its way even among econ- 
omists, and this at the traditional centre of the English school. 
And a few years more have now brought into full activity what is 
variously described as a reaction or a revolution, in which a deter- 
mined body of dissentients from the old political economy are 
striving, in every leading country, for some sort of reorganization 
of the science and its method, upon principles rather vaguely 
defined, but generally declared to be in peculiar harmony with 
those which have given new life to almost every other branch of 
learned investigation. 

To the present writer, this movement appears to be no revolu- 
tion, but a natural reaction, probably salutary, and destined to 
promote ultimately a rapid but still orderly development of the 
science, upon the lines laid down by the great masters of what is 
called the deductive school. The real import of the movement 
appears to him to be often misconceived, partly from a negligent 
consideration of the scope and proper limitation of the old eco- 
nomics, and partly from failure to observe the course pursued by 
the greatest masters of the new. It is proposed in the present 
article, therefore, to review briefly the position held by the deduc- 
tive school, to consider some of the shortcomings by which the 
way for reaction has been made easy, and to show what appear to 
be the characteristic tendencies and real drift of the new move- 

1 Quarterly Journal of Economics, October, 1886. 
30 



THE REACTION IN POLITICAL ECONOMY 3 1 

ment. In doing this, ground must be traversed which is so famil- 
iar to many readers, that nothing but the frequent and sometimes 
apparently studied neglect of its existence can be the writer's 
sufficient apology. 

Little space need be given to the formal description of the 

method used by what will be called here the deductive school. 

j . m 

The authentic statement of that method is found in Mill's " Logic," 
in the concluding paper in his " Essays on Some Unsettled Ques- 
tions," and also in Cairnes's "Character and Logical Method of 
Political Economy." As stated by these consistent followers of the 
Ricardian doctrine and conscious preservers of its continuity of 
development, the method starts from a few simple premises, collected 
by observation of the nature of man and of his environment, draws 
from these premises a series of logical conclusions, verifies these 
conclusions by fresh observation and comparison, and thus ascer- 
tains certain relations of cause and effect, which are termed laws. 
As an example of the application of this method, to be considered 
a little more in detail, Mill's " Principles of Political Economy " will 
be taken, not only as the most convenient, but because it presents 
the full and rounded statement of a system of leading doctrines, 
partly thought out in the " Wealth of Nations," and then given in the 
rough, with little effort for orderly statement, in Ricardo's writings. 

Mill has undertaken to investigate the production and distribu- 
tion of wealth, or, in other words, the nature and the results of the 
efforts, which it may be assumed that men living in civilized 
society will make, to provide the material goods by which the 
satisfaction both of physical and of mental wants is in large meas- 
ure secured. These efforts, he takes it for granted, will be made 
by preference along the lines of least resistance. They will be 
made also under the conditions of a natural tendency to increase of 
numbers, and of the application of labor to natural agents, which, 
when pushed beyond a certain point, no longer yield a proportional 
increase of returns. These data Mill finds sufficient for the estab- 
lishment of a considerable body of general propositions as to the 
use of labor and capital in production. 

But, for the investigation of the laws of distribution, it becomes 
necessary to have further data respecting the organization and 
methods of the society in which the distribution takes place. It is 
true that "whatever mankind produce must be produced in the 



32 ESSAYS 

modes and under the conditions imposed by the constitution of 
external things, and by the inherent properties of their own bodily 
and mental structure" ; and so a great body of truths as to pro- 
duction are as applicable in a communistic Utopia as in the United 
States or Great Britain. But, in dealing with distribution, some- 
thing must be premised as to the ownership of the natural agents 
and of the goods produced, and something also as to the freedom 
with which goods and services can be contracted for or exchanged. 
Mill, therefore, writing with reference to modern western civiliza- 
tion and for modern readers of the western nations, assumes at 
this point, as further premises, the private ownership of property, 
both real and personal, and the existence of a free competition. 
These assumptions import no judgment as to the necessity or the 
special excellence of the conditions assumed, nor does Mill ignore 
either the possible advantages of other conditions, or the fact that 
they may exist. His assumption as to private property is followed 
by a digression as to other systems, applicable to property in gen- 
eral or to real property in particular, in which the opinions 
expressed by the writer as to some fundamental arrangements of 
the society around him are generally thought to be heterodox. 
His assumption as to competition is made with a full recognition 
of the fact that, even where competition finds the fewest obstacles, 
its effects are often greatly modified and limited by the prevailing 
habits of the community ; and here again follows a digression, 
filling several chapters, in which are considered a variety of social 
conditions, ranging from slavery to cottier tenancy, under which 
competition cannot be said to act. Plainly, it is only as an 
observed fact, general enough to give shape to the mass of eco- 
nomic relations in the western nations, that the existence of private 
property is assumed ; and it is in the modern tendency of compe- 
tition to overcome the resistance both of institutions and of custom, 
and to be the prevailing rule of dealing, that Mill finds his warrant 
for assuming its free action as a premise for reasoning upon dis- 
tribution. The warning, however, that competition in any given 
case acts, as it were, in a resisting medium of greater or less 
density, and that conclusions based upon its possible maximum of 
effect are to be modified pro re nata, is given by Mill, not once for 
all and to be forgotten either by writer or reader, but repeatedly, 
and is enforced at several stages of his discussion. 



THE REACTION IN POLITICAL ECONOMY 33 

It is obvious that the process thus described is a study of the 
action of a certain force under given conditions, — the force being 
selected for consideration, not as being the sole spring of action, 
but as one generally found in operation, and the conditions being 
such as are usually presented by modern civilized life. The pro- 
cess is understood to be thus strictly limited, because of the com- 
plexity of the motives and external conditions by which the 
production and distribution of wealth are affected. A single great 
force is studied by itself, because this is believed to be a necessary 
preliminary to the study of its action when in composition with the 
other forces, which, although of secondary importance as regards 
the purpose in hand, are, nevertheless, to be finally included in 
any complete investigation; and this isolation of the force first 
brought under examination is affected by hypothesis, because it 
cannot be effected by experiment, as in physical science. Even if 
we suppose, then, that some other force or motive might better 
have been selected as the primary object of study, — a supposition 
warranted by the conclusions of few economists of any school, — 
it would still remain true that the adoption of this process by Mill 
is a strictly logical and philosophical method of arriving at impor- 
tant truths affecting a great department of human activity. Even 
if other methods should be found, more rapid or far-reaching, this 
would still be a scientifically defensible method of investigating 
the action of economic motives. 

This method is said, however, to be indifferent to facts, and, 
since it proceeds upon assumed premises, to lead to the evolution 
of a system having no necessary relation to the external world. 
Fairly considered, the verification of results reached by deductive 
reasoning should call for as patient collection and as conscientious 
sifting of facts as any other use of observation. But, beyond this, 
it is from facts that the suggestion must come of all such secondary 
influences or forces, which modify the action of the primary force 
investigated by the economist ; and it is from the study of facts and 
of their evidence as to the conditions under which such secondary 
influences act, that we must proceed in determining the law of their 
action. For example, Ricardo's law of rent is a deduction from 
simple premises respecting the effort to employ capital with the 
best profit on lands differing in productiveness or convenience. 
But, in reasoning upon rent or the value of land in any given 



34 ESSAYS 

country, Ricardo's law is found to give the clew, indeed, — but a 
clew to be followed through special conditions, often of wonderful 
variety. To the originally simple case of economic rent are added 
the modifications arising from customs of dealing between owner 
and occupant, from the speculative holding of land, or from changes 
in its uses, or revolutions in transportation. And these new con- 
ditions are the necessary objects of close study, as supplying the 
material for fresh reasoning, if the economist, following the deduc- 
tive method, seeks to advance his knowledge of cause and effect — 
that is, his knowledge of economic law — beyond the elementary 
state. So far from facts being a matter of indifference or being 
of only occasional use, in the deductive method, every one of the 
leading writers — Adam Smith, Malthus, Ricardo, the younger Mill, 
Senior, McCulloch, and Cairnes — either had special occasion for 
minute acquaintance with important classes of economic facts much 
reasoned upon by him, or shows the proof of special study of such 
facts. 

The further charge, that the results arrived at by the deductive 
method have no necessary relation to the external world, no doubt 
has so much foundation as this, — that the truths arrived at are 
conditional truths. Deduced from certain premises by a logical 
process, they are undeniable ; but, still, they declare only the effects 
of causes acting under specified conditions. So far from being of 
universal application, they are limited by their own complete logi- 
cal statement to cases where the conditions originally premised are 
present, and not controlled by any others. It is even conceivable 
that no exact parallel to the hypothetical case should ever present 
itself, and afford the simple and perfect realization in practice of 
an economic truth. To use the familiar illustration, in every 
actual case there might be some allowance needed for perturbing 
forces or friction. Still, few will deny that truths, even in this 
abstract form, if rightly apprehended and used, must be of the 
highest service in helping to understand the march of human 
affairs. 

It is a necessary consequence of the conditional nature of the 
truths arrived at by the deductive process that their use as guides 
of conduct is subject to strict limitations. No doubt, the tempta- 
tion to treat abstract truths as universally applicable, without 
qualification, has often proved irresistible. Still, the warning 



THE REACTION IN POLITICAL ECONOMY 35 

against this misuse of them is found in their statement. " The 
economist's conclusions," says Senior, " do not authorize him in 
adding a syllable of advice," — a negation which, it must be added, 
proved offensive to McCulloch, who was little disposed to let any 
opportunity for profitable exhortation pass unimproved. Plainly, 
Senior, in theory as well as in his own public service, regarded 
the results of the economist as contributory to practical judgments, 
but seldom as sufficient therefor in themselves. Taken in connec- 
tion with the special facts which surround any question, — the 
facts historical, social, psychological, or physical, which create 
special conditions, — economic truths are theoretically as essential 
as any others for the formation of sound opinions, and are also, 
taken by themselves, as insufficient. This limitation of their 
practical effect as supplying a part, but only a part, of the grounds 
of action, is of special importance, of course, in their bearing upon 
legislation. Economic laws, in strictness, deal with wealth ; but 
the object of legislation is welfare. Or, as Adam Smith says, when 
dealing with a special case, " Defence is of much more importance 
than opulence." Without multiplying citations upon this point, it 
is enough to recall Cairnes's declaration, often urged by him in 
different forms, that, " there are few practical problems which do 
not present other aspects than the purely economical, — political, 
moral, educational, artistic aspects; and these may involve con- 
sequences so weighty as to turn the scale against purely economic 
solutions." 

This recognized limitation of the scope of economic conclusions, 
as applied to practical affairs, brings to view what is sometimes 
indignantly described as the divorce of political economy from all 
ethical considerations. The economist, it is charged, carefully 
ignores all higher purposes and duties, that he may devote his 
thoughts to the pursuit of wealth alone. But need it be ex- 
plained that, in this alleged divorce, the only question really at 
issue is one of classification, — a question as to the drawing of 
a line for purposes of nomenclature between several fields of 
thought, all of which, it is admitted, must be traversed before 
action can be decided upon ? When the economist restricts his 
discussion to something less than the sum of all the considerations 
of right and expediency which must weigh in questions of political 
action, his contribution toward the final decision may indeed be 



36 ESSAYS 

pronounced important or the reverse, according to the judgment 
of the critic ; but there is as little ground for the moral condemna- 
tion sometimes fulminated, as when one investigator declares his 
field to be physiology and not therapeutics, or another devotes 
himself to the mechanical and chemical properties of the rocks, 
and not to their geological relations. It is only when the economist 
undertakes to apply his conclusions in disregard of other aspects 
of the political or social questions before him, and treats these 
questions as problems in political economy only, that there is room 
for the reprobation of his neglect of ethical considerations ; and, in 
this case, he is sinning against the law implied in his own method. 1 
Much confusion and misplaced censure, however, upon other 
points as well as this, might easily be avoided, by keeping in mind 
more carefully the necessary distinction between a science and its 
applications. 

But it is unnecessary to carry any farther this review of the 
characteristics of the deductive method. The method may be 
imperfectly applied by those who profess to use it, the conclusions 
reached by its means may be misinterpreted ; but it is in itself a 
process of careful investigation of causes and effects, naturally 
tending to the establishment of that orderly body of verified truths 
which is called a science. It is, in short, a strictly scientific 
method of approaching our great set of problems presented by the 
life of man in society. Other methods of approaching the same 
subject-matter may conceivably be used, but it is pure arrogance 
to claim for any other that it is the scientific method. 

It must be recognized as a fact, however, that political economy, 
as pursued by the deductive method, has seriously disappointed 
the hopes which formerly centred around it ; and this not merely 
because of the extravagance of the hopes, but also by reason of 
its own sterility in results. To the present writer, this state of 
things appears to be the consequence, not of some discovered weak- 
ness or insufficiency of the method, but of the failure of economists 
to pursue the path on which they had entered. For this failure, the 
very nature of the body of doctrine, which was early established, 

1 A striking instance of a wide range of considerations taken account of by an 
economist, when engaged as a legislator in the discussion of a grave practical question, 
is presented by Mill's speech in the House of Commons, 17 May, 1866, on the Tenure 
and Improvement of Land (Ireland) Bill. 



THE REACTION IN POLITICAL ECONOMY 37 

may perhaps afford a partial explanation. It has already been 
said that, in the system of principles stated by Mill, — and this 
means in the system obscurely suggested by Ricardo, — the pri- 
mary object of study is a single great force, acting under given 
conditions. Among these conditions is a tendency to steady 
increase of resistance as society advances, resulting from the laws 
of population and of production from land. What have been 
called the dynamics of political economy must, therefore, with the 
growth of a community and in any given state of the arts, develop 
a gradually slackened movement, pointing to an ultimate cessation 
of advance at the point where the motive force shall be offset by 
the increased resistance ; that is, to a state of quiescence, not 
necessarily unfortunate, but still demanding some new impulse as 
the condition either of further advance or of decline. This is 
the theoretical point, — far off, it may be, and postponed by every 
fresh discovery and the opening of new resources, but still con- 
ceivably attainable, — to which increasing numbers and declining 
profits point, as it were, by converging lines. Now, such a concep- 
tion, of which traces may be found in Adam Smith, seems in a 
certain sense to finish the task of economic science. The move- 
ment of human society has been forecast. The goal toward which 
the great constant force tends is ascertained. What remains, it 
might easily be asked, except to elaborate the reasoning, to rivet 
the logic, and to present the elements of the calculation more 
clearly ? It seems to have been some such conception as this, of 
a science completed and rounded and adequately describing the 
destined movement of every human society to its ultimate stage, 
that led Lord Sherbrooke, then Mr. Robert Lowe, to declare in 
1876 that the work of political economy appeared to him to be 
about finished. And many a younger student, who has admired 
the logical strength and symmetry of the system, has wondered at 
the seeming meagreness of its content, as he has found himself 
suddenly confronted by what might be mistaken for the last pos- 
sible deduction. 

That, dealing with such a system, economists should fail to 
push as they might their investigations into causes, was, no doubt, 
all the more natural by reason of the oppressive influence of the few 
great names which adorned the deductive school during its rise. 
And yet the method by which economic science should be carried 



38 ESSAYS 

into regions never penetrated by Ricardo was simple. It was only 
necessary to draw from the actual observation of affairs fresh 
premises relating to forces of what we have called the secondary 
order. There is a pregnant sentence in Mill's essay on defi nition, 
declaring that, in order to make political economy perfect "ag^an 
abstract science, "the combinations of circumstances which it 
assumes, in order to trace their effects, should embody all the 
circumstances that are common to all cases whatever, and likewise 
all the circumstances that are common to any important class of 
cases." In other words, the framing and insertion of new premises, 
and the tracing of effects in the ever increasing complexity of con- 
ditions necessary in order to reach all those " common to any im- 
portant class of cases," were the natural course of development. 
Upon this line Mill entered when, reasoning from the impeded 
flow of labor and capital from one country to another, he succeeded 
in adding to Ricardo's theory of international trade a theory of in- 
ternational values. Cairnes also took the same course, when he 
extended the same reasoning to the cases where competition is im- 
perfect in domestic exchanges, either as between different parts of 
the same country, or as between different industrial strata or occu- 
pations in a given community. In the same direction of fruitful 
development were the inquiries which Cairnes made at different 
stages of his career, as to the unequal measure in which the prices 
of different articles respond to a common influence, — as, e.g., to a 
cheapened supply of money, which is usually treated as affecting 
all alike and simultaneously ; and other examples could easily be 
cited from the same suggestive writer. 1 

Plainly, the system of political economy, as elaborated in the 
earlier part of this century, gave unlimited scope for investigation 
and expansion of this kind, and for the discovery of what have 
been called " derivative laws " of probable interest and importance. 
The very fact that, as already noticed, the system had to assume 
in the first instance, and in order to simplify its task, that compe- 
tition acts uniformly, shows that the whole field of distribution 

1 Professor James says of the old economy that it satisfied a demand for "something 
perfect in its way. It was indeed a closed circle, but it had consequently no line of 
advance." To go on with Professor James's figure, however, the deductions from simple 
premises being closed, new premises afford the opportunity for new circles, of wider and 
wider sweep, limited only by the variety of human interests to be dealt with. See 
Science Economic Discussion, p. 42. 



THE REACTION IN POLITICAL ECONOMY 39 

and exchange might be worked over, with new conditions drawn 
from observation, and with the promise of valuable results. Or, 
to take another region into which investigation by the deductive 
method might well have been carried, — that suggested by the 
familiar condition, "in a given state of the arts." The improve- 
ment of instruments, processes, and institutions, by which produc- 
tion is aided and the resistance of nature is offset, is ordinarily 
treated by the economist as something fortuitous, — to be allowed 
for in a given case, no doubt, but showing no stated recurrence 
which can afford a basis for reasoning. Ricardo and his contem- 
poraries naturally spent but little effort in speculating upon indus- 
trial and social changes, of which their time showed only the 
beginnings. Mill, writing when the changes had become revolu- 
tionary, saw that they were characteristic of the century, and that 
no term could be set to their extension. Still, in the greater part 
of his treatise, he was unable to do more than refer to them as 
transitory "counteracting influences," on the succession of which 
no great amount of reasoning needs to rest. It is clear, however, 
that these influences, although in one sense transitory, are for our 
time practically constant. Inventions, the opening of new conti- 
nents, the abolition of time and space, the economic rejuvenation 
of countries by social and political reform, follow each other in a 
long line and in a certain orderly movement. Reason compels 
us to reject the vision of perpetual advance ; but, for these gener- 
ations of the world's history at any rate, industrial improvement, 
or that which tends in the same direction, is not an accidental, but, 
as nearly as possible, a permanent force, acting with the primary 
forces of which the economist treats, but constantly masking and 
for the time, perhaps, reversing their effects. Here, then, has 
been offered the opportunity for the economist to make useful 
application of his method, for investigating the movement of 
society in the ascending part of its orbit, and dealing with a mass 
of striking phenomena, far too complex for systematic study with- 
out the working hypothesis already in his hand. 

It follows, from this view of the field open to political economy, 
as defined and studied by the deductive school, that the science, 
so far from having reached the end of its work, has before it a 
task which, as Cairnes says, is never to be completed, " so long as 
human beings continue to progress" ; for "the main facts of the 



40 ESSAYS 

economist's study — man as an industrial being, man as organized 
in society — are ever undergoing change." It follows, too, that, 
while the connection between assumed premises and the logical 
conclusion is immutable, so much of the economist's conclusions as 
are based on conditions peculiar to his own time must lose a part 
of their importance as years pass. To this extent, we may easily 
agree with the proposition so ably supported by Dr. Seligman, 1 
that "the economic theories of any generation must be regarded 
primarily as the outgrowth of the peculiar conditions of time, 
place, and nationality," and that " no particular set of tenets can 
arrogate to itself the claim of immutable truth." 

It must be added, moreover, that, if the development of politi- 
cal economy by its normal course had been pushed by the deduc- 
tive school, the science itself would have been held closer to 
modern life and to the great problems which demand their 
answer from the modern world. Bagehot complains that the 
science " lies rather dead in the public mind," and that young men 
do not feel " that it matches with their most living ideas." This 
is a natural result of the omission to deal adequately and systemati- 
cally with existing economic relations, in an age which is chiefly 
characterized by the multiplication and change of such relations ; 
and it seems clear that the position which the deductive political 
economy held, even twenty years ago, need not have been lost, if 
its followers had pursued the natural course of widening their 
discussion of economic law, by drawing steadily from the fresh 
experience of the day. 

What has happened in political economy, then, is a singular 
instance of a scientific inquiry stopped short in its path, it may be 
by the timidity — at any rate, by the failure — of those who had 
it in charge. In such a case, reaction is not only inevitable, but 
is probably the best hope of renewed activity and progress. Even 
if the reactionary movement itself should be misdirected or should 
run to excesses of its own, and should thus finally contribute noth- 
ing directly, the chances are still strong that it will be the stimulus 
of thought and of fresh investigation ; and, from such revival, 
science, pursued by sound methods, has nothing to fear. 

The reaction in political economy has come in the rapid growth 
of what is variously known as the German, the inductive, or the 

1 Science, 1 886, p. 375. 



THE REACTION IN POLITICAL ECONOMY 41 

historical school. 1 No one of these terms is well chosen. The 
new school can no longer be called German, for its influence is 
now so diffused as to be entirely independent of the place of its 
origin. To call it the inductive school, as is suggested by a natu- 
ral antithesis, implies some radical change in methods of reasoning, 
often vaguely asserted, but generally disappearing in any attempt 
at precise analysis. Even the term " historical," which it will be 
convenient to use here, seems to imply some peculiar use of his- 
torical material for the discovery of economic truth, as distinguished 
from its verification or illustration, — a use not to be detected in 
the leading writers of the new school, whose pages bristle with the 
results of hypothetical reasoning. 

In fact, so far as scientific method is concerned, it may be 
stated positively, that the leading writers of the new school do 
not agree in rejecting the deductive method, nor in adopting any 
other method inconsistent with this or ultimately exclusive of it. 
Use of deduction in some way and to some extent is admitted 
by nearly all, and is no doubt logically inseparable from the pro- 
cess commonly called inductive. Dr. Ely, no moderate supporter 
of the historical school, remarks that "the term inductive is to 
be applied to those writers who do not start out with all their 
premises ready made, but who include the induction of premises 
within the scope of their science, and proceed to use these prem- 
ises deductively." 2 This statement would no doubt bring the 
greater part of the English school and their followers, including 
the leading writers upon method, within the fold of the inductive 
school, and illustrates the difficulty of drawing any line between 
the two which shall, in fact, mark any distinction except as to the 
degree in which one or another is disposed to draw new premises 
from observation. 3 Schmoller, indeed, believing that the old 

1 Among the numerous statements of the history and tendencies of the new school, 
we may refer to Professor Ingram's remarkable article, " Political Economy," in the 
ninth edition of the Encyclopaedia Britannica, and to Dr. Ely's study, " The Past and the 
Present of Political Economy," in the second series of Johns Hopkins University Studies. 

2 " The Past and the Present of Political Economy," p. 8. 

3 A striking illustration of the real thinness of distinction as to method between 
the two schools is found in President Walker's comment upon Cairnes's statement of the 
deductive process, that " nothing could be added to this admirable statement of the 
logical method of political economy according to the so-called German school." " Politi- 
cal Economy," p. 15. 



42 ESSAYS 

method and its results are alike obsolete, would postpone for 
twenty years the attempt to construct a system of principles ; and 
this would unquestionably be a logical course to pursue, if the 
deductive method is rejected for inherent unsoundness, as often 
seems to be supposed. But leaders like Roscher, Wagner, Cohn, 
and writers in Schonberg's "Handbuch," who are recognized as 
representing the historical movement, accept and use conclusions 
which there is no pretence of having reached save by the old 
process of verified deduction. And Wagner's reply to Schmoller's 
contention that the old systematic dogma has been outlived is 
most emphatic. 1 He thinks it proper to object, he tells us, — 

that this rejection in the lump goes too far. The old master of historical 
national economy in Germany, W. Roscher, with good reason, has not thus 
thrown the "old dogma" overboard. And such a step would be all the more 
questionable from the difficulty of knowing how to fill up the deficiencies ; for, 
except some dry critical observations, there is nothing at hand which can take 
the place of the " old dogma." On the contrary, even the " historical national 
economists " make use, step by step, of propositions, e.g. in the theory of price 
and cost, which are either a part of the " old dogma," or follow as consequences 
from it. 

It must be added that it is also quite clear that this acceptance 
of the old results is not a mere provisional arrangement, — a con- 
cession made/r<? tempore, as it were, while some new method is 
getting into working order. To take as an example the case of 
Wagner, such a supposition would be inconsistent with the terms 
in which he has laid down some of the leading doctrines of the 
English school, 2 and, which is more important, is also excluded by 

1 See the article, " Systematische Nationalokonomie," by Adolph Wagner, in Jahr- 
b&cher fiir Nationalokonomie, 1886, p. 245. A large part of this article will be found, 
translated, in the Quarterly Journal of Economics for October, 1886. 

2 In the article just cited, p. 246, Wagner enumerates, as the weightiest points of 
the old " Dogmatik" the doctrine of the limitation of production from land and the 
theory of rent, the doctrine of population, the doctrine of the limitation of production 
by capital, and with it the wages-fund theory, with a few modifications. All these, he 
says, are held in substance by Cohn, Roscher, Scharfie, and himself. On the Malthusian 
doctrine, see an important note in Wagner's " Volkswirthschaftslehre," i., 145. It is 
interesting to observe that, with respect to the wages-fund, Wagner's approval is given 
to " Mill's older doctrine," and not to the restatement made and confuted by Mill him- 
self in 1869. For Roscher's position, see, inter alia, his "Grundlagen der National- 
okonomie," §§ 149-156, 242, 243. Compare also " Geschichte der Nationalokonomik in 
Deutschland," pp.652, 909. In Schonberg's "Handbuch," it is noticeable that the 
article on the theoretically crucial subject of distribution (by Dr. Mithoff, of Dorpat) gives 



■ 



THE REACTION IN POLITICAL ECONOMY 43 

his views as to the permanent function of the deductive method in 
economic investigation. Economic phenomena, in his opinion, are 
properly to be isolated by a hypothetical process, in order to de- 
termine their causal relations. " Only thus can they be rightly 
grasped and understood, and their connections and operative influ- 
ences investigated." 1 Without examining more closely into the 
contrast which Wagner, as well as others, draws between the 
deductive and inductive methods, it is enough to note the fact 
that, in his judgment, both must be used, but in varying propor- 
tions. " The individuality of the particular investigator must 
determine that now one and now the other method shall be applied 
more or less than it is by other investigators. This does not in 
itself present any occasion for praise or blame, but only the 
proper or improper application of each method in the concrete case, 
and the worth or worthlessness of the results secured by each 
investigator by the method which he uses." 2 Holding this broad 
ground as to the legitimate application of both methods, Wagner 
appears to view with equal distrust, not to say contempt, the ex- 
treme Historismus of some who are commonly reckoned as of the 
same school with himself, and the mere abstract dogmatism of 
some representatives of the old economics. Not by him, therefore, 
nor by the great writers of whom he may properly be taken as a 
leader and type, is countenance given to the pretension that a 
particular method in political economy is the scientific method, 
that its work alone is true investigation, or that upon its followers 
alone must rest the hope of the future. Some of Wagner's warn- 
ings, indeed, as to the mischief threatened by a spirit of exclu- 
siveness and by " Verschuhing" among scholars, seem to have been 

what would be called an orthodox discussion of the subject, for which Ricardo supplies a 
great part of the material. The wild talk, so often indulged in, about the " iron law of 
wages," finds little support from this writer, and as little from Roscher, Wagner, and 
Cohn. 

- 1 " Die okonomischen Erscheinungen gehoren doch nur zu den socialen, sind aber 
nicht kurzweg die socialen. Sie nviissen als etwas besonderes, wenn auch eng mit 
anderen zusammenhangendes erkannt, daher eben doch, methodologisch richtig, zunachst 
moglichst isoliert werden, wenn auch auf Grund eines hypothetischen Verfahrens in 
Bezug auf die kausalen und konditionellen Momente, unter denen sie zu Stande kommen. 
Nur so konnen sie richtig erfasst und verstanden werden. Als dann erst ist ihre Ver- 
bindung mit und ihre Beeinflussung durch andere soziale Momente zu erforschen." 
Jahrbur.her, 1886, p. 200. And see also p. 226. 
2 Jahrbucker, 1 886, p. 241. 



44 ESSAYS 

written with a side glance at tendencies visible in his own school 
in Germany and elsewhere. 

The " new departure " in political economy then, as illustrated 
by this typical case, consists at most in the addition of historical 
inquiry to methods of investigation already in use. The extent of 
this addition, and its relation to economic theory, ranges all the 
way from the copious use of history to illustrate theory — as in 
Roscher's principal treatise — to the specific investigation of eco- 
nomic history, with the light afforded by long familiarity with 
economic reasoning, of which in English a brilliant example is 
given us by Thorold Rogers. But, after all, the difference between 
the old school and the new is essentially a difference of emphasis 
or of relative weight given to the historical side of the subject, and 
not a radical change of method in arriving at economic truths. 
The movement by which historical inquiry is thus brought more 
or less into the foreground, according to the intellectual tendencies 
or the opportunities of the individual, is, no doubt, an important 
reaction against the opposite tendency, which had stopped the 
progress of political economy. But such a movement can become 
a revolution only when the old method and its results are frankly 
abandoned, as is demanded by Schmoller and the most advanced 
section, in the expectation of reconstructing the whole fabric of 
the science by a new process. That this reaction has a close 
affinity with the intellectual movement which has given new life 
and meaning to the study of history and jurisprudence is undeni- 
able. No doubt, the development of the industrial life of nations 
and of their economic institutions, and the causes which, in all 
that relates to material life, make one nation a different historical 
product from another, could have no complete exposition without 
the application of modern methods of research and comparative 
study. No doubt, too, the exposition of these subjects in the light 
of ascertained economic laws must be one of the conditions of 
the advance of social science and of wise legislation. All this, 
however, is far from carrying with it either the necessary unsettling 
of established doctrines, or the abandonment of the processes by 
which they have been established. 

There is another important subject, however, on which the new 
school of political economy is better agreed, and as to which it is 
understood to be in strong opposition to the old economists. This 



THE REACTION IN POLITICAL ECONOMY 45 

is the vast increase of the functions and activity of the state, now- 
called for in so many quarters. The old political economy, it is 
declared, was " atomistic," and dealt only with individuals: that of 
the future must be social, and must take the given society, not the 
individuals composing that society, as its unit ; society, as a con- 
scious whole, has duties limited only by the possibility of actively 
advancing the general well-being of its members ; its powers are 
to be adapted to this end, and, if adapted, are the justifiable, the 
most effective, and the necessary means of social advancement. 1 
A great and not easily definable extension of the activity of govern- 
ment is thus contemplated. That there is a "law of increasing 
functions of government" may be an extreme opinion; 2 but, at 
any rate, the old presumption in favor of individual freedom is at 
least obscured, 3 and for laissez faire is to be substituted a system 
of direct and pervasive, although carefully studied, interference. 
There is no doubt as to the loftiness of the ideal which such a 
system sets before the government of any modern state, or as to 
the qualities with which such a government must by some means 
be endowed, in order to approach this ideal. Such conceptions of 
centralized and all-sufficient power, we may add, are a natural 
effect both of imperialism and of democracy ; and, hence, at this 
juncture in the world's history, we have a set of the tide from 
opposite quarters, in favor of extending the functions of govern- 
ment, quite as marked as the doctrinaire tendency of the last 
generation toward non-interference. Whether the present flow 
is permanent, or is destined to be followed by an ebb, it is at 
present an active influence in large sections of existing society, 
and gives a marked character to the political economy of the new 
school. 

But to determine the relation of the new movement to the old 
political economy in this respect, requires some consideration of 
the place hitherto held by what is called the doctrine of laissez 

1 This demand appears in most urgent and, as it seems to the writer, questionable 
terms in Professor James's declaration that the State " must be continually interfering 
[to promote and create industry] ; otherwise, progress would stop, and retrogression set 
in." " Science Economic Discussion," p. 43. 

2 See Ely, "The Past and the Present of Political Economy," p. 52 ; and Wagner, 
" Volkswirthschaftslehre," i., 308. 

3 See Dr. Schonberg's language as to the decision between "freedom and unfree- 
dom." " Handbuch," i., 48. 



irVi 



46 ESSAYS 

faire. There is plainly a broad distinction between the assump- 
tion of non-interference as one of the conditions of a problem on 
which we are reasoning, and a recognized principle or maxim that 
no interference with individual choice, under such circumstances, 
is justifiable or expedient. To take the case in which interference 
is most familiar, — in the reasoning upon international trade and 
international values, — the problem is to determine the mode of 
action of the reciprocal demands made by two trading countries. 
The reasoning must of necessity — in the first instance, at any rate 
— suppose the exchange to be free from any influences except 
those whose effect is under investigation ; namely, the desires of 
the countries respectively to satisfy certain wants with the least 
effort, and the means of satisfaction offered by their respective 
industrial conditions and resources. To introduce the supposition 
of governmental interference by the levying of duties on the one 
side or the other, would obviously bring in a new element, not 
necessary to the essentials of the problem, and of infinitely vari- 
able action and intensity. The exclusion of such a supposition, 
however, carries no implication whatever as to the right or expedi- 
ency of interfering ; nor can the conclusions reached, after such 
exclusion, afford more than a part of the grounds on which to rest 
a judgment as to such right or expediency. And the distinction 
thus to be made in the reasoning as to international dealings holds 
good in the discussion of other leading topics. For example, in 
the discussion of domestic supply and demand and of price, it is 
assumed that the dealings are free from control or influence by 
any superior power; and, in discussing wages and profits, it is 
assumed that the competition of individual interests acts by itself. 
But, plainly, the question whether competition may be restricted 
by law or by combination, or should be free, must be answered 
by entirely independent reasoning. No answer is implied, or is 
approached, by that reasoning which merely seeks to ascertain 
the normal effects of the primary forces with which political econ- 
omy has mainly occupied itself. 

It seems, then, that laissez faire is no part of the logical 
structure of the old economic doctrine. The most rigid Ricardian 
may accept it or reject it, and equally without derogation from his 
purity of doctrine. And, if we inquire into the opinions as to par- 
ticular cases of governmental action held by some leading econo- 



THE REACTION IN POLITICAL ECONOMY 47 

mists of the old school, we shall find among them a singular and 
often forgotten indifference to the doctrine so commonly associated 
with the system which they built up. Adam Smith, as is often 
recalled in a different connection, gave his sanction to interference 
in the two test cases of the navigation acts and of protective duties 
in certain cases. Malthus supported the protective duties on Brit- 
ish corn. Senior, dealing with such practical subjects as distress 
among the hand-loom weavers and the reform of the poor laws, 
reached conclusions and made recommendations often entirely 
inconsistent with any idea of laissez faire. Even McCulloch, 
anxious to uphold the maxim pas trop gouverner, still commended 
some legislation on factory labor, on the dwellings of the poor, 
and on employer's liability. Mill, first or last, suggested legisla- 
tion as the cure for pretty nearly every evil not deemed positively 
incurable. In every one of these cases, — and the. list might be 
extended easily, — it is clear that the writer had no principle, as 
regards governmental interference, which could prevent his recom- 
mending it, if he thought the object aimed at important enough, 
and the prospect of success good. And Cairnes finally went so 
far as to declare expressly that "the maxim of laissez faire has no 
scientific basis whatever, but is at best a mere handy rule of prac- 
tice, useful, perhaps, as a reminder to statesmen on which side the 
presumption lies in questions of industrial legislation, but totally 
destitute of all scientific authority," or, as he said in another place, 
" a rule which must never for a moment be allowed to stand in the 
way of the candid consideration of any promising proposal of social 
or industrial reform." 1 

It is plain, in short, that, not only logically, but according to 
the practice of leading economists, 2 the maxim of laissez faire y 
whatever validity we assign to it, has to do only with the practical 
applications of economic reasoning, and has no place as a part of 
the reasoning itself. It belongs in the same sphere with a great 
variety of other considerations, which must be weighed by the legis- 
lator and by the economist when he considers legislative proposi- 

1 See his essay on "Political Economy and Laissez Faire," "Essays in Political 
Economy," p. 244. 

2 But for a highly fanciful statement of laissez faire as an integral part of the deduc- 
tive political economy, see M. Laveleye's article, Revue des Deux Mondes, July, 1875, 
P- 447- 



48 ESSAYS 

tions, but which do not affect those relations of cause and effect 
known as economic laws. It is no doubt true that, for various 
reasons, the great majority of economists of the deductive school 
have in fact given so much effect to the maxim as to recognize 
a presumption in favor of non-interference, to be set aside only for 
strong reasons. In the familiar case of protective customs duties, 
it is no doubt true that their conclusions in favor of freedom have 
often rested upon such broad ground as to account for, if not jus- 
tify, the common belief that a general doctrine of laissez faire lies 
at the foundation of the deductive political economy. Still, it is 
with perfect ease, and with no sense of logical inconsistency, that 
the German writers already noticed can adopt the most critical 
points of doctrine from the English school, and yet demand an 
increase of the state's activity, without apparent limit. 

But behind this practical tendency in favor of a more effective 
use of the authority of the state, lies what seems to be regarded 
as the chief theoretical characteristic of the new movement, " the 
reunion of ethics with political economy." The power of society 
is to be directed by a keen sense of duties, scientifically defined 
and recognized. The obligation to consider other and higher aims 
than the mere enriching of the community, the duty of treating 
the laborer as something more than a certain amount of energy to 
be made effective by the administration of certain doses of capital, 
the constraint of Christian brotherhood, are to be enforced as a 
part of the teachings of political economy. And thus, it is 
declared, a new life is to be given to a science which has hitherto 
regarded man as living by bread alone. Without wasting time 
upon a needless defence of the older political economy, against 
charges certainly not based upon any real examination of the uses 
to which economic truth has been held to be applicable, it must be 
remarked that a good deal of the current talk of an ethical politi- 
cal economy appears to contemplate merely the infusion of emotion 
into economics. But, after all, can there be any doubt that even 
the most generous emotions must find their place, not in reasoning, 
but in the use of the results of reasoning ? Is there any doubt 
that our sympathy with the aspirations of the working classes in 
their centuries of effort, or our zeal for whatever shall bring the 
masses of society into the full light and warmth of modern civiliza- 
tion, is and must always be altogether foreign to the question as to 



THE REACTION IN POLITICAL ECONOMY 49 

the causes which determine wages ? Both in the pulpit and in the 
press, it sometimes seems to be assumed that really humane econo- 
mists may be expected to avoid any conclusions which unpleasantly 
recognize the persistence of moral as well as physical evil. But, 
surely, there is no need of arguing that humanity and generosity, 
or their opposites, are not to be predicated of a string of syllogisms. 
And it is hardly more necessary to point out that even the enlight- 
ened conscience must find its place for action after reason has 
determined the conditions under which it is obliged to act. I.i 
short, the question what ought to be, or what we wish, must be 
kept clear from the question what is, if we wish for any trust- 
worthy answer to either. Bastiat is a good example of what befalls 
an economist who permits his aspirations for great ethical and 
social aims to mix with his reasoning ; and, in his case, we have, 
as the result, a set of harmonies which, it seems to be agreed on 
all sides, are admirable in every respect except consonance with 
fact. 

So far, then, as relates to the determination of economic truth, 
we may be certain that the greater weight promised to ethical con- 
siderations by the new school will have no effect. It will continue 
to be necessary in this as in every other department of investiga- 
tion, that the investigator should proceed with a single eye to the 
truth, and that reason alone should guide his inquiry as to scientific 
law, — in short, that the logical process should be logical, leaving 
to the emotions, conscience, and the higher law their own field of 
activity at another stage. It was a shock to Mr. Carey's sensi- 
bilities to find Senior declaring it the economist's duty to allow 
" neither sympathy with indigence nor disgust at profusion and 
avarice, neither reverence for existing institutions nor detestation 
of existing abuses, neither love of popularity nor of paradox nor of 
system, to deter him from stating what he believes to be the facts, 
nor from drawing from those facts what he believes to be the 
legitimate conclusion." 1 But, doubtless, even Mr. Carey would 
have found it difficult to present any other hopeful or even possi- 
ble basis for scientific discussion. As little can the historical 
school, if it is to do any permanent work, allow either generous 
aspirations or social duties to interpose their influences, except in 
their due place. 

1 Carey's "Social Science," i., 196. 
E 



50 ESSAYS 

That such an influence has its due place before economic results 
are applied in practice, is not a matter of serious dispute ; * and the 
whole question of the relation of ethics to political economy- 
resolves itself, therefore, as was pointed out in the earlier part of 
this article, into a bare question of classification. Shall our nomen- 
clature be such as to make the term " political economy " include 
the ethical sphere or not ? To the present writer, the strict limi- 
tation of the term appears to be the preferable, as it has been the 
common, usage. But whether this usage is retained or not can 
make no difference as to the course really to be followed. How- 
ever our classification may divide or group the topics relating to 
this order of thought, the process adopted for the elucidation of 
scientific law must of logical necessity be kept free from ethical 
considerations; and these considerations must, by equally strin- 
gent necessity, be taken into account finally among the grounds of 
action. " But, if the science is only to consider what is and not 
what ought to be," complains Laveleye, " it can neither propose 
nor pursue any ideal." To which it must be rejoined, that the 
business of a science is not to propose or pursue ideals, but to 
ascertain truths, — a work which ought not to be perturbed by 
aspirations any more than by any other form of prepossession. 
And, as truths once ascertained are to be used in due place and 
season, it is easy to see that the great aim, the advancement of 
society, is not set at risk by the strict regard paid to the definition 
of a science, as M. Laveleye seems to apprehend. 

The new movement, then, on the whole, although represented 
by impassioned advocates as a revolution which is to sweep the 
ground clear and give the world a new political economy, is, in fact, 
a development of the existing science, under the influence of a 
strong reaction against tendencies which had prematurely checked 
its advance. So far as this development is historical in character, it 
means a fresh impulse given to the study of the social fabric, past 
and present, in its origin and its results, but not at present the 
adoption of any new method of investigation, even if, in dealing 

1 The extreme advocates of laissez /aire are sometimes spoken of with a misplaced 
note of reprobation, as if they denied the existence of all moral considerations in con- 
nection with any question touching wealth ; but clearly there is no necessary inconsist- 
ency between a full recognition of the moral aspect of a subject and disbelief in the 
right or power of government to act upon it. 



THE REACTION IN POLITICAL ECONOMY 51 

with this subject-matter, any real change of method is practicable, 
— a point which may at least be held in reserve until further 
proof. And, so far as the new development is social or ethical, it 
means an increase of weight given to obligations which have been 
ignored oftener than denied, and the consideration of which can 
neither supersede nor control any reasoning, deserving the name 
of scientific, upon economic questions. The importance of the 
movement, even in this view of its scope, as tending to direct the 
attention of the economic world, for the present generation at least, 
to new problems, and perhaps to revive its interest in topics too 
easily neglected, can hardly be overrated. But this new direction 
of thought is, after all, not the absolute break of continuity so 
often proclaimed. 

It is to be said, too, that such a movement as the present need 
not be regarded with a jealous eye, by those of us who still believe 
that the method of Ricardo and Mill and Cairnes is the best and 
even the only sure method, for threading the way through the 
mazes of conflicting motives which underlie economic phenomena. 
Even the excessive cultivation of fields heretofore neglected must 
be viewed by the adherents of the deductive school as not only 
natural, but hopeful. They will not deny that the current political 
economy needs to be brought into closer relation to the life of to- 
day ; and, whatever else the reaction may succeed or fail in doing, 
it will certainly compel all economists to carry their researches 
deeper into actual phenomena. Moreover, so long as the investiga- 
tion of truth, by whatever means, is the guiding purpose of the 
movement, its result must be the accumulation of material, rich and 
varied, to be brought ultimately into the service of science. And, 
even if dogmatism and the growing arrogance of a school secure 
the sway and wreck the possible career of the new economics, the 
old will at least have undergone a salutary discipline and received 
a new impulse. 



/*<?! 



THE ACADEMIC STUDY OF POLITICAL ECONOMY 1 

The last quarter of a century has seen a remarkable envelop- 
ment of political economy as an academic study. For special 
reasons connected with the organization of the universities and of 
institutions for liberal education generally, this development is not 
so marked in France or England as it is in Germany, in the United 
States, or, perhaps, in Italy ; but it has everywhere been sufficient 
to bring forward economic science, from its old position as the 
curious pursuit of a limited class of specialists, to a recognized 
place as a department of thought, the further exploration of which 
must be carefully provided for by any well-equipped academic 
body. In our own country in particular, no one of the moral 
sciences has made a more rapid or solid gain than political 
economy, either in the extent and importance of its scientific inves- 
tigations, or in the dignity of method and spirit which characterizes 
its work, or in its educational value. 

The reasons for this important advance, it is to be noted, are in 
some degree independent of those which determine the value of 
economic science for the professional educator and make it for him 
an important branch of liberal training. For him it is a study 
which is to discipline and open the mind, and prepare it to meet 
the problems offered by professional work or by active business. 
The educational value of economic study has, in fact, but little to 
do with the actual content of the science. Even if it were, as has 
been said, a mere discussion of " lunar politics " or of social rela- 
tions under the rings of Saturn, although it would lose in interest, 
it would still afford one of the best means of training the reason- 
ing powers to deal with the questions of complex causes presented 
to us in such infinite variety by human life. 2 In short, the value 

1 Quarterly Journal of Economics, July, 1 89 1. 

2 See some excellent remarks on this subject by Professor Patten, of the University 
of Pennsylvania, in his paper on " The Educational Value of Political Economy," in the 
publications of the American Economic Association, vol. v., No. 6, p. it. 

C2 



THE ACADEMIC STUDY OF POLITICAL ECONOMY 53 

of political economy as a dialectic would remain, although it found 
no immediate application in the society around us. Probably every 
earnest teacher of the subject feels an interest in his work, then, 
and has in view the attainment of objects, entirely different in kind 
from the interest and the purposes which, to the non-professional 
observer, would seem to be most natural. 

But the interest with which the general public view the aca- 
demic study of economics and the widespread demand for its 
extension, as well as the pressure of students for introduction to its 
elements and its methods, no doubt spring from entirely different 
considerations. It is the perception of the scope and importance 
of the questions with which political economy deals that turns the 
popular current so strongly toward it to-day. It is keenly felt 
that on the right answer of these questions must depend not only 
the future progress of society, but also the preservation of much 
that has been gained by mankind in the past ; and it is inevitable 
that the community should desire to see such problems investigated 
under the conditions and by the methods which are found to be 
fruitful in other departments of study, and to have the younger 
generation trained for economic reasoning and investigation as 
thoroughly and assiduously as they are for the languages or phi- 
losophy or natural science. We say advisedly that "the com- 
munity " desire to see this; for nothing is more striking than the 
interest which those who are called practical men often show in the 
prosecution and encouragement of this class of studies, in which 
nevertheless they take but little part directly. That the scientific 
man and the practical man are apt to lack each other's strongest 
qualities — and so are complementary to each other, but are rarely 
complete • — is a notorious cause of misapprehension and waste of 
energy ; 2 but in this case we have both working together, in their 
common eagerness to promote the investigation of economic ques- 
tions, as they might for the promotion of the natural and physical 
sciences, which so readily fix the attention of the non-professional 

1 The remark of Mill may be recalled, that, " while the philosopher and the prac- 
tical man bandy half-truths with one another, we may seek far without finding one who, 
placed on a higher eminence of thought, comprehends as a whole what they see only in 
separate parts, — who can make the anticipations of the philosopher guide the observa- 
tion of the practical man, and the specific experience of the practical man warn the 
philosopher when something is to be added to his theory." " Essays on Some Unsettled 
Questions," p. 157. 



54 ESSAYS 

observer. We can go farther, and say that public opinion in 
general, in the countries which stand highest in the intellectual 
scale, is catholic in its judgments of the results of economic inves- 
tigation, tolerant of differing opinions, and fully awake to the 
essential importance of complete freedom of thought and of expres- 
sion. Especially is this the case in Germany, which for some 
years past has succeeded in maintaining the first place in this 
branch of learning as in so many others. Complete intellectual 
independence has there been conspicuous among the favoring con- 
ditions of intellectual progress. 

The universities have everywhere found themselves encouraged 
and even required, therefore, to take up the investigation of 
economics with vigor and to push it by scientific methods. The 
leading European universities, it is well known, have long been 
raising the standard of their equipment and encouraging research 
in this as in every other department of learning. But, limiting our 
observation now to American institutions alone, the last fifteen 
years have witnessed a complete transformation of their work in 
political economy. In the largest and most thoroughly organized 
of them, where time has generally been gained for an extended 
training, the independent examination of economic theories, the 
comparison and weighing of writers, the determination of the 
points at which important schools diverge, and the application in 
all cases of the logical test, which leaves no place for the mere 
authority of a name, have been carried to a point which even fifteen 
years ago would have been thought impossible. 1 The study of 
economic history in its most important fields has been prosecuted 
with success, contributions of recognized value have been made to 
the literature of economics, and students everywhere have learned 
to watch with interest the results of American investigation and 
scholarship. The work that has been done, it is safe to say, has 
been done with increasing thoroughness and fidelity. The tone 
of American economics, often supposed to echo only the English 
school to which the scholars of every country are proud to 
acknowledge their indebtedness, has been modified in a singular 

1 Without attempting an exact measurement of the increase of work which has 
taken place, it is probably safe to say that in the six or eight leading American institu- 
tions the number of hours of instruction given per week to economics has increased on 
the average six or seven fold since 1876. 



THE ACADEMIC STUDY OF POLITICAL ECONOMY 55 

way in favor of the free and continuous development of theory ; 
and the study and interpretation of economic history, discarding 
the easy post hoc propter hoc of the partisan, has become the labo- 
rious and impartial search for the facts which test theories and ex- 
emplify principles. No ''American school" has been developed 
in this rapid progress ; but economic study in the United States, in 
the institutions of learning as well as outside of them, has had a 
serious part in the general movement of economic thought in the 
world at large. 

This work has been carried on, as has already been said, by 
scientific methods and in accordance with a public demand that it 
should be so carried on. The question often raised whether politi- 
cal economy is in fact a science is not material here. Political 
economy at any rate aims to discover the forces which determine 
certain phenomena of society, their direction, strength, and mutual 
relations. It is, then, in any case a study of cause and effect, and 
as such must be studied in the scientific manner, whatever place 
may be assigned to it in the scientific hierarchy. The circle of 
emotions, hopes, and moral judgments springing from any eco- 
nomic fact may be boundless ; but the relation of that fact to its 
cause and its consequences is as certainly a question to be settled 
by appropriate scientific methods as the perturbation of a satellite 
or a reaction observed by the chemist. And undoubtedly the 
essential of the scientific manner of study is, that truth alone 
should be the object of pursuit, and that the methods of investi- 
gation should be such as from the nature of the subject-matter 
will lead to the truth most directly and surely. That the results 
obtained by such methods should be agreeable or the reverse, 
that they should accord with prevailing ideas or interests or be in 
opposition thereto, is altogether aside from the purpose in hand. 
Are the results true ? is the only test question to be recognized in 
such an inquiry. That the process of investigation or reasoning 
is not to be warped in order to make a given conclusion attainable, 
that any conclusion thus attained by illegitimate means is not only 
worthless, but noxious, follows as a matter of course when the 
truth for its own sake is made the aim. 

The universities, in general, are aided in their efforts to incul- 
cate the scientific spirit in economic students by a very important 
body of tradition and example within their own walls. The young 



56 ESSAYS 

student of political economy, who is urged to carry on his investi- 
gation as one of scientific interest, and not merely of transient 
political concern, cannot help feeling the influence and catching 
something of the spirit of the investigators at work in other fields 
around him. The patience, thoroughness, and singleness of pur- 
pose which mark successful efforts in the great body of scientific 
pursuits set the standard for him. His own teachers may fall 
short of their own ideal of scientific method, they may even be un- 
true to it, and yet the observing student will feel the sweep of the 
great current which carries all genuine lovers of science toward 
the same end. This influence of the general intellectual move- 
ment has, moreover, been strengthened in no small degree by the 
change which has taken place in the methods of study pursued in 
political economy itself. The cultivation of the so-called historical 
method can never make political economy anything other than a 
deductive science, deriving its laws by logical conclusion from 
premises which are freed by abstraction from all non-essentials. 
But it would be idle to deny that the verification of conclusions by 
observation and the selection of new premises for further reasoning 
— in a word, that the thoroughness of the deductive process and 
the general scope of the study — have been advanced in a high 
degree by the improved methods of research and comparison, 
which have been made applicable in political economy as well as 
in other moral sciences. It would be difficult to find a writer upon 
economics, however severe his theoretical method, whose mental 
attitude does not show a remarkable change from the "stalled" 
condition in which his predecessors of thirty years ago found 
themselves. And the student finds in this extended range of inter- 
est at once a stimulus to the acquisition of the best equipment 
and training for independent research, and a safeguard against 
the mere absorption of an expounded system. So far as the true 
scientific spirit has made its way, the student in economics, as else- 
where, more and more follows Bacon's injunction, to "read, not to 
contradict and refute, nor to believe and take for granted, . . . but 
to weigh and consider." 

So much being premised as to the spirit and method at present 
governing the academic study of economics, in the leading institu- 
tions in all countries having any important place in the intellectual 



THE ACADEMIC STUDY OF POLITICAL ECONOMY 57 

world to-day, we have next to remark upon the singular derogation 
from scientific methods implied in the demands frequently made 
in the last few years in the United States for some different and 
special treatment of the burning question of protection or free 
trade. That this question should be singled out for such demands 
is no doubt due to the fact that, especially since 1880, it has become 
political to a greater extent than for many years previously. As 
a political question, it is often treated by partisans in the heat of 
discussion as if its solution were the chief, and sometimes as if it 
were the only, aim of political economy. It would not be difficult 
to cite public speakers, very high in station, who have been alto- 
gether unable to recognize any other subject of interest in the 
economic field : whereas, it must be remarked for completeness of 
statement, international trade has to compete for attention, in any 
general survey of that field, with such broad and absorbing ques- 
tions as those relating to money, land, labor, and socialistic reform, 
all of which antedate the free-trade controversy and are likely to 
disappear only with human society itself. These questions are all 
intrinsically as important as the question between a high tariff and 
a low one, and every one of them probably concerns our material 
interests in even greater degree, and with our material interests 
others still more vital. But on no one of these subjects has dogma 
yet fairly crystallized into political platforms, and they are, there- 
fore, still recognized, by most of the world, as the proper subject- 
matter for unbiassed scientific inquiry ; and the answer to be given 
by science is still looked for with interest, if not with hope. 

The call for exceptional treatment of the question between pro- 
tection and free trade is, in effect, a demand that upon a contro- 
verted point, as to which scientific opinions are not at one, political 
economy shall be made to give its answer in a particular, predeter- 
mined sense. This is the real purport of the complaints made by 
scores of public speakers in the canvass of 1888, and frequently 
repeated by the press, as to the supposed tendencies of the instruc- 
tion in political economy in a large part of the American colleges 
and universities. The complaints, in most cases at least, did not 
relate to methods of training or investigation ; for they were mani- 
festly made without knowledge of the methods pursued. The gist 
of the complaints was that certain specified results of reasoning 
had been reached, — results not set down as eccentric and possibly 



58 ESSAYS 

indicative of individual lack or balance, but commented on as 
showing necessarily and of themselves a certain bias in the aca- 
demic mind generally. In short, the attempt was made to judge 
of a body of scientific inquirers by reference, not to their pro- 
cesses, but to their opinions upon questions still sub judice. This 
was not far different from requiring of them the profession of a 
creed. 

In some cases, the requirement of a creed has gone still farther, 
if very widespread report may be trusted. In more than one state 
university, and in some minor institutions within the last few years, 
it has been understood the purpose has been avowed of filling 
existing vacancies only by the appointment of men holding a par- 
ticular set of. opinions upon the vexed question. It has long been 
an open secret that, at an earlier date, one important school of 
public economy was founded with the express provision that it 
should avoid the judicial attitude of a scientific body and establish 
an active propaganda of the views of its founders. 1 It would be 
hard to find a parallel for such intolerance of scientific investiga- 
tion and substantial indifference to truth as these cases disclose, 
in any institutions of equal standing, when dealing with any other 
subject claiming scientific rank. Indeed, the closest parallel to be 
found is that presented by the denominational theological schools, 
in which, a creed being required by the rigor of the case, any pre- 
tensions on the score of scientific character naturally take an 
altogether subordinate position. It is, in fact, difficult to imagine 
any corresponding requirement made of a professor of geology, or 
chemistry, or mathematics, and nearly as difficult to imagine it in 
the case of a philosopher, historian, or jurist. The case may 
indeed be cited of a seminary in South Carolina, the trustees of 
which, a few years ago, were so ill-advised as to displace a pro- 
fessor on the avowed ground that he was an evolutionist; 2 but 
this transaction was too much obscured by the odium theologicum 
to be important in the present connection. 

1 The secrecy which was judiciously maintained as to the text of the original 
instrument in this well-known case makes it impossible to cite the exact language here. 
It is understood that wiser counsels have ultimately prevailed, and that the impossible 
terms of the original foundation have been relaxed so as not to be inconsistent with the 
dignity of self-respecting scholars, or with the enjoyment of scientific reputation by the 
school itself. 

2 See the A T ation, October 2 and December 18, 1884. 



THE ACADEMIC STUDY OF POLITICAL ECONOMY 59 

More plausible, but not more defensible in reason, than the 
requirement of a creed is the suggestion not infrequently made, 
that upon a subject like this it is the duty of a fully equipped uni- 
versity to have instruction given upon both sides of the controverted 
question, and by instructors selected for this purpose, — not se- 
lected, therefore, as being the best available persons, irrespective 
of their opinions upon this matter, but selected because of those 
opinions in order to represent opposing theories. Any individual 
dealing with such a question, it is maintained, must have his opin- 
ions formed. Let his desire to preserve a judicial impartiality in 
training and directing his students be, then, as great as it may, his 
own thought as to the conclusions to be reached, it is said, must 
needs give a bias to his instruction, and in any case must be evident 
to his hearers, carrying authority in their minds and thus tending 
to educate them exclusively to his views. Therefore, it is con- 
cluded, both sides should be presented with conviction by those who 
are qualified and anxious to set their respective opinions in their 
best light, and the ingenious student should be permitted to make 
his choice of results freely. There can be no doubt that what is 
called a "joint discussion" thus permanently established in a uni- 
versity would be a highly attractive exhibition, and that by its aid 
a study sometimes found arid might easily be made entertaining. 
But here, again, there is probably no other subject in the academic 
range concerning which such a proposition would not instantly be 
covered with ridicule — no other subject, with the possible excep- 
tion of theology, in which the incongruity of establishing a man to 
preach a doctrine and calling this the promotion of science would 
not be instantly perceived. There may, indeed, be the case in 
which two expositors of a given subject by fortunate chance 
present it in different aspects, and true investigation may gain 
thereby ; but this is something radically different from the propo- 
sition which we are now considering, to establish a permanent 
polemic between men selected as advocates, not to say as partisans. 

The reason of this incongruity is not far to seek. Let us sup- 
pose "By-way of illustration that, by some change of public opinion, 
the socialistic movement should reach the political stage of devel- 
opment, and some proposition involving the main principle should 
find its affirmative or negative in all the party platforms. Nothing 
could be more natural than for the socialists to declare that, for the 



60 ESSAYS 

right investigation of their system, the presentation of it by con- 
vinced socialists is absolutely necessary, that justice to their argu- 
ments cannot be expected from those who still cling to the old 
order of things, and that debate between advocates will best eluci- 
date the truth. Indeed, the socialists might well set up to-day the 
demand for special representation upon the staff of any large uni- 
versity, if the importance of the question raised by them, its inevi- 
table claim for an answer, and the risk of prepossession against 
them, are sufficient grounds for such representation. But among 
sober-minded seekers of truth — and we have no concern with any- 
body else — there would be little doubt that, in any such case, the 
process of systematic representation of adverse views would be 
the conflict of prejudices rather than a true investigation, and that 
it bears no likeness whatever to the careful and reasoned methods 
by which any scientific inquiry advances from step to step. In 
short, the method of treatment would be felt to be incongruous 
with the subject-matter. The same would be true of every ques- 
tion of economics, so far as it is a fit subject for academic treat- 
ment. The subject-matter is in every case a relation of cause and 
effect, requiring to be studied with a single eye to truth of result ; 
but the proposed method effectually excludes the probability of 
such study on either side of the question, by presupposing advo- 
cacy, when the process of investigation plainly ought to be kept 
as free as is humanly possible from every disturbing influence. 1 

After all, however, the question must remain, What is the 
proper treatment of the disputed topics which necessarily come 
to view in the scientific exposition of political economy ? As has 
been said above, these topics are not few in number, although few 
of them have reached the political stage. The economic and 
social effects of private ownership of land; the effects and the 
claims for preference of different methods of t axation , direct or 
indirect, upon property real or personal, and proportional or pro- 
gressive ; the choice between government currency and bank paper, 
and between the gold standard and the free coinage of silver ; the 

1 There is, of course, paid representation of opposite opinions, and perhaps upon 
essentially scientific propositions, whenever a court hears a case argued by counsel ; but 
this method of informing the highly trained mind of the court of all the considerations 
that can be presented on either side, as a preparation for its decision, has no analogy to 
the case of the university, where the minds addressed are, from the nature of the case, 
not yet trained, and the work in hand is not decision, but training. 



THE ACADEMIC STUDY OF POLITICAL ECONOMY 6l 

choice between private and state ownership of public works ; the 
powers and duty of the state with respect to combinations of cap- 
ital on the one hand and of labor on the other ; the fundamental 



question of all, as to the organization of society upon the basis of 
individual property rights or upon that of communism, qualified 
or complete, — such questions as these, no less than that between 
protection and free trade, fill the public mind, frequently divide 
enlightened opinion, and call for investigation by processes, if they 
can be found, as scrupulously scientific as those of mathematics. 
On some of these questions the judgment of the best trained econ- 
omist may well be in suspense. On some of them, and perhaps 
on most, every earnest scholar is likely to have his opinion formed, 
and in that case, although his mind should still remain open for 
fresh light, is tolerably certain to feel his interest strongly engaged 
on the one side or the other. Such is the inherent difficulty of 
treating by scientific methods any subject which has a direct bear- 
ing upon the action or well-being either of society or of its indi- 
vidual members. 

Nothing need be said here as to the necessity of impartiality 
of judgment, for that is of the essence of any scientific method. 
As little need be said of the frequently suggested claims of sym- 
pathy or patriotism, for these have their place in an inquiry of an 
entirely different order from the search for economic truth. It is 
to be presumed that the guide in such a search preserves at any 
rate the consciousness of impartial purpose, and aims to keep his 
mind free from all influences foreign to the matter actually in 
hand. Giving him the benefit of this presumption, what is he to 
do w ith- the, occasions which lie all along his path for the state- 
ment or suggestion of individual opinion upon questions like those 
referred to above ? 

At this point we must recall the distinction often insisted upon 
by economists, and as often forgotten by them as by anybody else, 
between economic laws and the application of those laws in practi- 
cal administration and legislation. The economic law, the deduc- 
tion of pure science, is simply the statement of a causal relation, 
usually between a small number of forces and their joint effect, 
possibly between a single force and its effect. For the statement ^ ^\W* 
of that relation the case has been freed from every disturbing 
element, and with the result, it is hardly necessary to repeat, of 



s 



62 ESSAYS 

giving a proposition which, however important, is only condition- 
ally true. The laws of value, in their simplest generalfzation"are 
true only under certain assumed conditions of complete competi- 
tion. The law of rent is a fine example of a law of never failing 
operation, which, however, is not usually seen with its conditions 
in the absolutely simple state in which the economist, for the pur- 
poses of reasoning, imagines them. But, when we come to the 
application of economics to legislation, we enter at once into a 
region of necessarily confused conditions, and also become con- 
scious of objective ends often having little or no relation to any 
economic doctrine. For any purpose of legislation, the social and 
industrial conditions of a country — such as they have been made 
by long past history, by newly kindled enterprise, or by sudden 
calamity — have to be a guiding consideration. The present 
needs of a people have to be weighed, perhaps, against what might 
seem to be its ultimate advantage ; and what is socially or politi- 
cally possible has to be accepted as the limit. 1 The objects aimed 
at by legislation may also be entirely different from those sug- 
gested by simple economic deductions. For the purposes of the 
legislator, even the certainty of economic loss which is indicated 
by some unquestioned principle may be an entirely immaterial 
consideration, to be set aside as of no weight in comparison with 
the object in view, or as merely the cost which he can afford to 
pay for some great uneconomic gain. 2 We can even conceive the 
economist as deliberately contravening, in view of the general con- 
ditions of the case, what would seem to be the natural conclusion 
from his own doctrine, — as, for example, we may conceive a be- 

1 Mr. Keynes observes that "in a few departments, such as those of currency_and 
banking, we meet with cases where, having determined the economic consequences of a 
given proposal, we practically have before us all the data requisite for a wise decision in 
regard to its adoption or rejection. But more usually — where we pass, for instance, to 
problems of taxation, or to problems that concern the relations of the state with trade 
and industry, or to the general discussion of communistic and socialistic schemes — it is 
far from being the case that economic considerations hold the field exclusively. Account 
must also be taken of ethical, social, and political considerations that lie outside the 
sphere of political economy regarded as a science." " The Scope and Method of Politi- 
cal Economy," p. 55. It may be doubted, however, whether, even in such departments 
as currency and banking, simple cases are so easily found as is here implied. 

2 And so Adam Smith says, " As def en ce, however, is of much more importance 
than opul ence , the act of navigation is, perhaps, the wisest of all the commercial regula- 
tions of England." " Wealth of Nations," Bk. IV., ch. ii. 



THE ACADEMIC STUDY OF POLITICAL ECONOMY 63 

liever in the single gold standard advocating, in the present state 
of the world, international bimetallism, or vice versa. It is com- 
mon, therefore, to hear the questions of legislation, which are to 
be determined in view of a confused mass of conditions, perhaps 
not closely related to each other, spoken of as " simple questions 
of exp ediency ," with the suggestion, implied if not expressed, that 
economic science has nothing to do with them. Questions of ex- 
pediency alone they cannot be, for they all involve the action of 
economic forces; but they undoubtedly are mixed questions, in- 
volving considerations of expediency, it may be of highly complex 
character, and therefore not to be determined by any purely scien- 
tific test. 1 

Here we reach a distinction of some consequence with reference 
to the proper, treatment of the great disputed questions. The 
investigation of economic law is a strictly scientific inquiry, as 
much as the investigation of the law of gravitation, and the de- 
termination of economic law falls within the competence of the 
university. Indeed, one of the great objects for which the univer- 
sity exists is to train minds for such inquiry and to further the 
advance of knowledge in precisely such obscure departments. 
But on the mixed questions of legislative policy and expediency, 
it is not the province of the university to pronounce. They indeed 
involve questions of science, as they involve much else ; but their 
solution is not an act of the scientific judgment. It is, on the 
contrary, an act of the political judgment, enlightened by the aid 
of economic science, of jurisprudence, of the study of human 
nature itself, or whatever else may serve to clear up the matter 
in hand. The historical narratives in which the great questions 
of the past lie embedded are no doubt objects of university study, 
and the unravelling of their tangled threads affords a valuable 
training, by means of a subject-matter of unfailing interest ; but 
it is no part of the business of the university to pronounce ex 
cathedra upon the policies which may find in such narratives some 
illustration, but which must after all rest upon indeterminate and 
probably transitory conditions. So, too, the great financial and 
industrial questions of the day supply the best of material for 

1 Compare the common remark that " freedom of trade is good in theory but not in 
practice," which is a manner of saying that conclusions, scientifically correct in the 
speaker's opinion, must be applied with careful regard to extraneous conditions. 



64 ESSAYS 

practice in the analysis of complicated problems and in the collect- 
ing and weighing of evidence ; but in all this it is the acquisition 
of power in the dealing with problems, and not the solution of any- 
practical question, that is the real matter in hand. The university 
may, and if successful in its true functions will, supply scientific 
data for the use of all who are concerned in the settlement of 
legislative and administrative questions ; but, when to these data 
are added the many others which form a part of the basis for all 
practical decisions, the further declaration of opinion from the 
university chair becomes an obiter dictum, not necessary in the 
strict performance of duty, and raising some difficult questions of 
expediency. 

The distinction here taken between strict scientific questions 
and mixed questions of science and expediency, it is true, is not 
usually observed. In a loose use of language, we are apt to speak 
of any question involving economics as an economic question, and 
to treat it, possibly until judgment is given against us, as some- 
thing to be settled by scientific reasoning alone. But is there one 
such question which the wise legislator will dispose of in this 
manner, or as to which the considerate economist, whether in the 
chair or out of it, will give on scientific grounds an unreserved 
judgment? It is only by extending the definition of political 
economy itself, so as to include a vast region of politics and ethics, 
and thus destroying the possibility of all scientific precision, that 
we can describe as economic questions a great mass of those which 
commonly pass for such. This confusion of boundaries is no doubt 
often ventured upon, and with the eager student the temptation 
to it must always exist. Nevertheless, the line between political 
economy and the allied subjects appears to be drawn by reason 
and necessity, as well as by authority ; and, being drawn, it brings 
with it the distinction here made between the question of science 
and those of practice. 1 

1 Professor Marshall observes that " it is not the function of a science to lay down 
practical precepts or to prescribe rules of life. The laws of economics, as of other 
sciences, are couched in the indicative, and not in the imperative, mood : taey are 
statements as to the effects produced by different causes, singly or in combination. 
They are not rules ready for immediate application in practical politics." And in a 
note, remarking upon the tendency of some writers, especially in France, to enlarge the 
scope of political economy so as to make it include practical politics, the same writer 
adds : " Of course an economist retains the liberty, common to all the world, of express- 



THE ACADEMIC STUDY OF POLITICAL ECONOMY 65 

The teacher of political economy must be supposed, however, 
as has already been remarked, to have his views upon the questions 
which lie beyond the strict limit of scientific conclusions ; and as 
one who is much occupied with the subject-matter in one of its 
aspects, and so is familiar with its importance, he may be expected 
to hold his opinions with strong conviction and interest. But, in 
his capacity as teacher, is he to express these opinions or to with- 
hold them ? The way to an answer to this question may be 
partially cleared, perhaps, if we consider the general relation of 
instructor and student, as regards their respective conclusions upon 
the subjects of their study in common. In no moral science is there 
a body of truths, as in the exact sciences, capable of demonstration 
by a process which shall exclude the possibility of difference of 
judgment between instructed minds. The great service done by 
the instructor in moral sciences is, as has been said above, to train 
the mind of the student to scientific reasoning. That the student 
should learn to reason truly is of far more consequence than that 
he should perceive and accept any particular truth ; and the real 
success of the instructor is found, not in bringing his students to 
think exactly as he does, — which is unlikely to happen, and indeed 
unnatural, — but in teaching them to use their own faculties ac- 
curately and with measured confidence. Even within the strict 
bounds of science, then, the instructor is little concerned with 
the greater or less uniformity of conclusion among his students, 
and is not properly concerned at all with anything like the propa- 
gation of his own views. He is interested in making his reasoning 
process clearly understood ; but this is because of the value of the 
logical process itself, and not for the sake of producing conviction 
in the particular individuals addressed. There is no duty laid upon 
the instructor's conscience to satisfy every doubt and to inculcate 
certain propositions as absolute truth ; but it is his duty to show how 
to practise clear analysis and just discrimination in scientific reason- 
ing, and, if he has done this with success, he may well be content. 

And when we come to the questions of applied economics, the 
questions in which science and political expediency both have their 

ing his opinion that a certain course of action is the right one under given circumstances. 
And, if the difficulties of the problem are chiefly economic, he may speak with a certain 
authority. But so may a chemist with regard to other problems, and yet no reasonable 
person regards the laws of chemistry as precepts." " Principles of Economics," i. 89. 
F 



66 ESSAYS 

part, we come to a class of possible decisions which, according to 
the view here taken, it is distinctly the duty of the university in- 
structor not to press upon his students. Dealing with such ques- 
tions, as he must in order to make a comprehensive survey of his 
own proper field, it is his business to carefully disentangle the 
scientific considerations from all others, and to show their limita- 
tion as determined by the supposed conditions which underlie the 
scientific reasoning. But it is not his province to strike the balance 
between all the conflicting interests and arguments, scientific, 
political, and ethical, which actually present themselves for con- 
sideration. Still less is it his business to enforce the conclusions 
which, upon such balance being struck, appear satisfactory to his 
own mind ; for if as regards the questions of pure science he has 
an object in view more important than mere conformity of belief 
even in the best established truth, still more on the debatable 
ground must he give a subordinate place to such conformity. 
Indeed, looking solely at his relation as instructor, the assent of 
his pupils upon questions outside of the scientific range becomes 
as irrelevant as their agreement with his preferences in party 
politics or with his religious beliefs. 

This, however, is not the same thing as to say that the instructor 
should suppress his opinions on the class of mixed questions now 
in view. His dignity may forbid a course which might be inter- 
preted as concealment ; and there are, moreover, few men whose 
weight of authority is such as to compel any extraordinary caution 
in the declaration of their minds. As a citizen, taking his part in 
the affairs of the community, the instructor has occasion to form 
opinions and to act upon them ; and it is his right in that relation 
to do what he may to lead others to act with him. In the univer- 
sity, however, he is under other obligations ; and there it is for him 
to decide, how far, with his habit of mind and his temperament, he 
can give expression to judgments lying beyond his proper sphere, 
and yet related to it, without injury to the severe neutrality of sci- 
ence which he is bound to preserve within that sphere. It may 
well be that no two men could follow with advantage the same rule 
in this respect. It has sometimes been said of this or that teacher 
of economics, in the friendly comment of former pupils, that after 
long intercourse the teacher's opinion upon some great question of 
the day was still unknown to the pupil. The bearing of such com- 



THE ACADEMIC STUDY OF POLITICAL ECONOMY 67 

ments is equivocal, depending very likely upon conditions of which 
no observer, however close, can judge. If the teacher's silence as 
to his own opinion was the result of fear of misconstruction or 
dread of controversy, his timidity deserved small praise. If he 
was silent because this appeared to him the only way to preserve 
the judicial attitude prescribed by his position, he may have laid J n 
down a stricter rule for himself than was necessary, and so, after 
all, may not have attained the highest success. If he was silent 
because the importance of holding his students to strictly scientific 
analysis and deduction, in which they would find their best training 
and most solid results, was always uppermost in his mind, and 
because any individual opinion upon questions of a secondary order 
was therefore unimportant for his purpose and as it were intrusive, 
then, indeed, the comment is complimentary. But it is only the 
teacher himself who can determine whether it really does thus 
mark the self-forgetful devotion of his best powers. 






RICARDO'S USE OF FACTS 1 

In the current criticism of the economists of the old school, 
frequent mention is naturally made of what is understood to be 
Ricardo's fondness for mere theorizing. In a general way, it is 
admitted that he was a man of affairs; but, as a writer upon 
economics, he seems to his critics, and no doubt to a large part of 
his readers, like a man writing in a cave, the course of his thoughts 
not being at all affected by the actual transactions of life. And 
yet he did himself suppose that facts had their part in determining 
his conclusions. He expresses the hope, in the preface of his 
principal work, that it will not be deemed presumptuous in him to 
state his opinions upon the questions therein treated, after having 
given his best consideration to the subject, after the aid derived 
from some eminent writers, "and after the valuable experience 
which a few late years, abounding in facts, have yielded to the 
present generation." Nevertheless, in the treatise which follows, 
facts are rarely cited in proof or otherwise ; and even the illustra- 
tions are imagined cases put by the writer. 

This characteristic of Ricardo's treatise is best explained by 
recalling the circumstances under which the book was written and 
published. It is now before the world as the author's formal 
exposition of his system ; and, as an exposition, it confessedly 
leaves much to be desired. But it is to be remembered that it is at 
least doubtful whether the author originally wrote for publication. 
McCulloch's statement, probably made upon the best information, 
is express, that Ricardo hesitated to publish, and was unwilling 
thus to risk a high reputation. " Ultimately, however, he was 
prevailed upon, by the entreaties of his friends, to allow his work 
to be sent to the press." 2 That James Mill was one of these 
persuasive friends, we have upon the authority of John Stuart 

1 Quarterly Journal of Economics, July, 1 887. 

2 See also Annual Biography, 1824, p. 374. 

68 



RICARDO'S USE OF FACTS 69 

Mill, who speaks in his "Autobiography" of Ricardo's work as" a 
book which never would have been published or written but for 
the entreaty and strong encouragement of my father ; for Ricardo, 
the most modest of men, though firmly convinced of the truth of 
his doctrines, deemed himself so little capable of doing them justice 
in exposition and expression that he shrank from the idea of pub- 
licity." 

It appears from these notices not unlikely that Ricardo's book 
was written, not for the public eye, but as a statement of opinions 
made for his own purposes, and that its publication was an after- 
thought of his friends. And this view of the case is confirmed by 
the structure of the book itself, which is a series of monographs 
scattered over the field of political economy, such as a thoughtful 
man might commit to writing when clarifying his own ideas on the 
subject, but is by no means a systematic exposition, even such as 
a writer of so little rhetorical pretension as Ricardo might be 
expected to produce. This appearance of being a fragmentary 
collection of essays is even more strongly marked in the original 
edition than in the later ones, to which the author was induced to 
make some important additions. 

Writing, probably, with little reference to any large circle of 
readers, Ricardo contents himself in these irregularly connected 
chapters with a simple statement of the operation of causes. He 
may here and there refer to an historical case in which a cause 
discerned by him operated ; but such reference is not necessary 
for his present purpose, and is made by exception, and not upon 
system. If he wishes to illustrate, he finds it easier to frame a 
case, as men will do in discussion nine times out of ten, by saying, 
"Suppose a commodity of 1000/. value rises to 1200/., or falls to 
800/.," and so on. " My object," he says, " was to elucidate princi- 
ples ; and, to do this, I imagined strong cases, that I might show 
the operation of these principles." 2 

But, in his pamphlets, Ricardo was generally writing for a dif- 
ferent purpose, and with distinct reference to the reading public. 
The occasion required a different method of treatment, and thus 
a certain sidelight, as it were, is thrown upon his mental processes 
and his equipment for discussion. The range of subjects covered 
by his pamphlets is limited to the currency and to free trade in 

1 See Ricardo's letter in the Edinburgh Review, January, 1837, cited by Bonar. 



JO ESSAYS 

corn, these being the questions which pressed the hardest upon 
English economists in the fourteen years of his activity; but the 
method pursued is significant. In his principal work, his discus- 
sion of money and the allied topics, and of all that bears on the 
effects of free corn, is of the same cast as his discussion of other 
subjects. We have the same severely logical statement of abstract 
principles and the same use of imagined cases for illustration, with 
nothing whatever to show any special study of facts or acquaint- 
ance with practical affairs. In the various pamphlets on the cur- 
rency, however, and in that on protection to agriculture, which is 
the practical sequel of an earlier theoretical essay on the effects 
of a low price of corn, he shows that behind the abstract discus- 
sions of his book lay a great reserve of facts and observations, ready 
to be drawn upon whenever the task in hand seemed to require. 
The same thing is true of his many speeches in Parliament, as 
reported in Hansard from 1819 to 1823. The subjects of the 
speeches are chiefly connected with the currency, the national 
debt, taxation, and agricultural distress. But the discussion 
throughout rests upon the knowledge of a keen-sighted and 
experienced observer, skilled in the scientific interpretation of 
phenomena. So far is he in these speeches from neglecting fact 
for theory, that it would be easy to cite important cases in which 
he went beyond the opinion of the House, by sacrificing the close 
application of theory in deference to the unusual conditions then 
affecting important questions. 

With regard, then, to questions which Ricardo had occasion to 
treat before an audience or for a considerable circle of readers, we 
find that he was thoroughly equipped, and that he made ample use 
of facts for illustration, verification, or the premises for argument, 
although, in his chief work, the same questions are treated with a 
singular exclusion of all reference to the actual world around him. 
It is fair to assume, then, that under like circumstances he would 
have treated other questions also in the same practical way ; and 
that what appears in his treatise as a complete separation of theory 
and fact does not indicate the mental habit of the author or the 
limit of his resources, but is only the peculiar cast given to the 
treatise by the special circumstances of its composition. 



SOME PRECEDENTS FOLLOWED BY ALEXANDER 

HAMILTON 1 

The system of finance established under Alexander Hamilton's 
administration of the Treasury of the United States has been 
represented as a slavish imitation of the English system or as an 
astonishing piece of original invention, according to the political 
leanings of the critic. In the following pages the present writer 
proposes to consider the apparent origin of some parts of Hamil- 
ton's work, and incidentally to observe the light which is thus 
thrown upon these conflicting allegations of imitation and 
originality. 

It is worth while to remark at the start that, under the early 
practice of our government, the Secretary of the Treasury occu- 
pied a position more nearly like that of an English Chancellor of 
the Exchequer than the present spirit of Congress would allow. 
The arrangements for securing his responsibility 2 were defective; 
but the responsibility itself, not only for administration, but for 
guiding the course of legislation, was recognized. The early com- 
munications of the Secretary to Congress often presented some- 
thing like a budget, with a statement of the measures necessary 
for its working, and any new proposition became a government 
measure. The method began almost from the first to show its 
incompatibility with the thorough separation of legislative and 
executive functions aimed at in many of our arrangements ; but, 
nevertheless, it made the financial system with which the govern- 
ment set out substantially Hamilton's system, as Congress expected 
and intended. 

1 Quarterly Journal of Economics, October, 1888. 

2 Madison stated the nature of the responsibility as follows : " There will be responsi- 
bility in point of reputation, at least a responsibility to the public opinion with respect 
to his abilities ; and supposing there is no personal responsibility, yet we know that 
men of talents and ability take as much care for the preservation of their reputation as 
any other species of property of which they are possessed." Annals of Congress, June 
25, 1789. 

7* 



72 ESSAYS 

The purpose of Congress to throw upon the Secretary the 
burden of shaping the financial course of the government appears 
in the first steps taken on the subject of public credit. The act 
establishing the Treasury Department became a law on the 2d 
of September, 1789; and the nomination of Hamilton as Secretary 
went to the Senate on the nth. 1 The demand for action "for 
the revival of public credit and the advancement of the national 
honor " had already been brought before the House by the peti- 
tion of public creditors living in Pennsylvania ; 2 and their petition, 
on the day when the Treasury bill became a law, was referred to 
a committee, consisting of Madison, Vining, and Boudinot. This 
committee contented itself with recommending a mere declaratory 
resolution that provision for the national creditors was necessary, 
and that the subject should be considered at the next session. 
When this report came before the House, however, on the 21st 
of September, a resolution was added and adopted, directing the 
Secretary of the Treasury to prepare a plan and report it to the 
House "at its next meeting." That this addition was made as 
the result of some consultation and settled policy is made probable 
by the adoption at the same time of a new resolution, directing 
the Secretary to apply to the executives of the several states for 
statements of their public debts and the amount of securities of 
the United States held by them, and to report the information to 
the House at the next session, plainly contemplating the possible 
assumption of state debts as a part of the plan of finance to be 
prepared. Without entering upon this vexed subject, however, 
it is enough now to point out the specific demand thus made 
upon Hamilton for a comprehensive scheme, just ten days after 
his appointment as Secretary. This was the contemporaneous 
interpretation of the clause in the Treasury act, which declares it 
to be "the duty of the Secretary of the Treasury to digest and 
prepare plans for the improvement and management of the 
revenue and for the support of the public credit." 

1 As early as May 27, Madison thought that, when the department should be estab- 
lished, the Secretary would be Jay or Hamilton, and that "the latter is, perhaps, best 
qualified for that species of business"; and June 30 he wrote that "Hamilton is most 
talked of." " Letters and Writings of Madison," i. 472, 484. 

2 See Annals of Congress, August 28, 1789. The majority of these petitioners joined 
the next year in a remonstrance against the funding act. " American State Papers, 
Finance, " i. 76. 



PRECEDENTS FOLLOWED BY ALEXANDER HAMILTON 73 

When Hamilton, in accordance with this resolution, took up 
the problem of creating public credit, with all that such creation 
implied, he was barely thirty-two years old. He cannot be said 
to have had any special training for finance. He had been a 
reader on economic and financial subjects, had been an interested 
observer of financial measures, had taken some share in financial 
discussion, and had undergone the rapid educational process to 
which practical politics always subject the statesman. In his 
case, with his marked natural capacity and his good equipment 
of learning, this process had no doubt carried him far ; but his 
experience had never reached the actual management of affairs 
on a large scale, as scales were measured in those days, nor the 
shaping of important financial legislation. He took up his prob- 
lem, then, as a public man often must, relying upon his general 
training, observation, and judgment to lead him to a safe conclu- 
sion. It appears certain that he relied upon no adviser better 
versed than himself in practical affairs. He appears to have 
made a few inquiries of a general kind, not suggestive of his own 
purposes ; 1 but there is a strong probability that his own mind 
was made up early as to some leading features of his scheme, and 
that the friends finally taken into his confidence were not invited 
to share the responsibility of devising and deciding. 2 

It is a strong proof of the sobriety of Hamilton's judgment 
that, in determining his course under these circumstances, he 
sought for the most part to adapt to his purpose methods and 
agencies which had been tested by experience ; for that is the 
great characteristic of his " Reports on Public Credit and on a 
National Bank." There is little of the effort to invent or to work 
out theories leading to some novel expedient, by which an ambi- 
tious man so often seeks to exhibit his originality of device and 
improve his chance for fame. On the contrary, Hamilton sel- 
dom shows a disposition to go beyond the range of already tried 

1 For example, see his letter to Madison, October 12, 1789, in Hamilton's "Life of 
Alexander Hamilton," iv. 60. 

2 It is to be noticed that Wolcott, although in the Treasury, writes to his father 
November 3, 1789, " What arrangements are in contemplation with respect to the public 
debt, I have not been able to learn ; " and as late as January 10, 1790, when Hamilton's 
plan was waiting to be presented to the House, Wolcott seems not to have been well in- 
formed as to the rate of interest to be proposed. Gibbs, "Administrations of Washing- 
ton and Adams," i. 23, 35. 



74 ESSAYS 

expedients, except when required to do so by the conditions of his 
task. His fondness for disquisition, perhaps, in a measure justi- 
fies Mr. Adams's reference to his published documents as " essays 
which, under the name of reports, instilled much sound knowl- 
edge, besides some that was not so sound, into the minds of 
legislature and people." 1 He had, moreover, great fertility in 
ingenious intricacies and fondness for them, as was shown in 
several of his later and subordinate financial propositions' But, 
in laying down his general plan for a financial system, he appears 
to have held his natural tendency in check for the most part, and 
to have acted with a consciousness that the matter in hand was 
too grave and its relations too comprehensive to allow him to 
travel freely beyond the line of tried and known expedients. 

And this explains his steady reliance upon the results of 
English experience. At that day, the statesman who looked for 
example to guide him in finance could hardly find it anywhere 
except in English or Dutch methods. France, after a long course 
of folly, had declared her bankruptcy in the year in which Hamil- 
ton's administration began. Spain could give no lessons except 
in the squandering of great opportunities and resources. Russia 
and Austria were both struggling with inconvertible paper and 
financial discredit and distress. The smaller states of Germany 
and Italy neither had important results to show nor were much 
known. And, of the two most familiar and most instructive cases, 
there can be no doubt that the experience of Holland was in most 
respects less likely to be applicable to the conditions of the 
United States than that of England. Unless, then, the financial 
organizer were resolved to disregard the lessons to be learned 
from foreign finance, he must of necessity draw those lessons 
chiefly from English practice. What Hamilton's favorite study 
would have been if France had been financially as fortunate as 
England, we need not inquire. France had not been thus fortu- 
nate, and even an Anglophobist could have looked in but one 
direction under the circumstances. 

<yC The features of Hamilton's scheme which we may advan- 
tageously compare therefore with the English precedents are his 
scheme for funding the debt in order to determine and moderate 
its immediate burden, his plan for a sinking fund, and the charter 

1 Henry Adams, " Life of Albert Gallatin," p. 268. 



PRECEDENTS FOLLOWED BY ALEXANDER HAMILTON 75 

of the first Bank of the United States. These measures stand 
together, as those by which the public obligations were to be 
defined and met, and national and private interests were to be 
united for mutual support. The assumption of the state debts 
and the settlement of accounts with the several states also held 
an important place in the system, but the considerations involved 
were so special that these measures do not fall within the range 
of our inquiry. The system of credit also rested upon the hope 
of a sufficient provision of revenue; but this Hamilton sought 
wherever he could find it, and under such limitations in the 
choice of his measures as made their origin a matter of little 
significance. 

Taking up first in order the plan for funding the domestic debt, 
proposed by Hamilton in the " Report on Public Credit " of Janu- 
ary 9> I 79°> we na ve the measure which was declared to be de- 
vised for the purpose of mystifying the public and establishing a 
perpetual debt in imitation of what was understood to be the 
English policy. Premising that the Secretary assumed as probable 
that the interest of money in the United States " will, in five years, 
fall to five per cent, and in twenty to four," he proposed to fund 
the heterogeneous mass of securities and claims, which made up 
the domestic debt, as follows : — 

First. — That for every hundred dollars subscribed, payable in the debt (as 
well interest as principal), the subscriber be entitled, at his option, either 

[1] To have two-thirds funded at an annuity or yearly interest of six per 
cent, redeemable at the pleasure of the government by payment of the principal, 
and to receive the other third in lands in the Western Territory, at the rate of 
twenty cents per acre ; or, 

[2] To have the whole sum funded at an annuity or yearly interest of four per 
cent, irredeemable by any payment exceeding five dollars per annum, on account 
both of principal and interest, and to receive, as a compensation for the reduction 
of interest, fifteen dollars and eighty cents, payable in lands, as in the preceding 
case ; or, 

[3] To have sixty -six dollars and two-thirds of a dollar funded immediately 
at an annuity or yearly interest of six per cent, irredeemable by any payment ex- 
ceeding four dollars and two-thirds of a dollar per annum, on account both of 
principal and interest, and to have, at the end of ten years, twenty-six dollars and 
eighty-eight cents funded at the like interest and rate of redemption ; or, 

[4] To have an annuity, for the remainder of life, upon the contingency of 
living to a given age, not less distant than ten years, computing interest at four 
per cent ; or, 



76 ESSAYS 

[5] To have an annuity for the remainder of life, upon the contingency of 
the survivorship of the younger of two persons, computing interest in this case 
also at four per cent. 

In addition to the foregoing loan, payable wholly in the debt, the Secretary 
would propose that one should be opened for ten millions of dollars on the follow- 
ing plan : 

[6] That, for every hundred dollars subscribed, payable one-half in specie 
and the other half in debt (as well principal as interest), the subscriber be en- 
titled to an annuity or yearly interest of five per cent, irredeemable by any pay- 
ment exceeding six dollars per annum, on account both of principal and interest. 1 

No doubt the appearance of great complication is given to this 
scheme by the ingenious arrangement for leaving to the creditor 
his choice between several methods of funding, equivalent in value, 
but having different attractions for the investor. With a domestic 
money market as yet untried and with public credit still to be 
created, it may well have appeared dangerous to Hamilton at the 
end of 1789 to stake his success upon the possible popularity of 
any single form of investment. Still there can be no doubt that 
Congress judged wisely in rejecting this part of his scheme and in 
adopting a method of funding based on his third proposition. 2 The 
bolder course of proposing uniform terms of exchange to all the 
creditors proved to be free from the risk which Hamilton sought 
to avoid, the form of securities adopted proved to be satisfactory 
to investors, and the number of classes of new securities to be 
created was somewhat reduced. The proposition as given above 
remains a striking instance of Hamilton's chief foible as a finan- 
cier — his fondness for ingenious and nicely calculated expedients, 
sometimes admirable as mathematical tours de force, but elaborated 
beyond the real needs of the occasion. 

Taking the first three of Hamilton's propositions, there is little 
in them to remind us strongly of the English precedents, except 
the use which is made of variety in the terms of redemption. The 
English legislation had already made the three per cent consols 
and the reduced three per cents redeemable at par upon a year's 
notice. The four per cents had been irredeemable for ten years, and 
the fives for thirty. As a refinement upon this variation in time, 
Hamilton fixed a limit to the rate of redemption, guaranteeing 
the creditor against payment except by small instalments, instead 
of securing him against payment for a definite time. This limit 

1 "American State Papers, Finance," i. 20. 2 Senate Journal, July 16, 1790. 



PRECEDENTS FOLLOWED BY ALEXANDER HAMILTON JJ 

upon redemption Hamilton used to increase the weight of his offers, 
as English financiers had used the limit of years ; and Congress 
adopted it for the first and last time in the Funding Act of 1790, 1 
when they gave the creditor (1) for his principal two-thirds in six 
per cents bearing present interest, and one-third in sixes not bearing 
interest until 1801, neither series being redeemable except by pay- 
ments limited to eight per cent for principal and interest in any 
one year, and (2) for his interest three per cents redeemable at 
pleasure. 

Whether Hamilton adopted from any quarter, or indeed main- 
tained at all, a policy of permanent public debt, is a question which 
it is convenient to postpone for the present. So far as the terms 
of redemption proposed by him bear upon this point, however, it 
may be said here that his first proposition was for a security per- 
petual in the sense in which the larger part of the English funded 
debt was perpetual, having no fixed time for maturity, but redeem- 
able whenever the government might find redemption convenient, 
— temporary or perpetual therefore according to the financial 
strength of the debtor. Of the securities redeemable at a limited 
rate, described in his second and third propositions, his four per 
cents had the longest life secured to them ; and these, if redeemed 
by a series of annual payments of five per cent for principal and 
interest, would last for forty-one years from the beginning of the 
series, calculating the interest at four per cent for the whole 
period. 

When we come, however, to Hamilton's fourth and fifth propo- 
sitions, we have plainly an expedient drawn from the life-annuity 
system, which the English government had used as a method of 
borrowing at intervals from the time of William III., and which 
the Dutch government had practised still earlier. Here, again, 
Congress acted wisely in avoiding a plan better adapted to the 
habits and wants of an old community than to those cf a country 
just emerging from colonial and frontier life ; and the proposition 
stands as an additional proof of the tentative character of Hamil- 
ton's early propositions and the difficulty which he found in fixing 
his judgment as to the nature and demands of the coming money 
market, on which the fate of his effort to establish public credit 
must depend. 

1 Act of August 4, 1790, "Statutes at Large," i. 138. 



y8 ESSAYS 

The least creditable of Hamilton's propositions is that in which, 
"as an auxiliary expedient," he proposed a loan on the plan of a 
tontine, with the right of survivorship among those entitled to the 
annual payments : — 

To consist of six classes, composed respectively of persons of the following 
ages : — 

First class, of those of 20 years and under. 

Second class, of those above 20, and not exceeding 30. 

Third class, of those above 30, and not exceeding 40. 

Fourth class, of those above 40, and not exceeding 50. 

Fifth class, of those above 50, and not exceeding 60. 

Sixth class, of those above 60. 

Each share to be two hundred dollars ; the number of shares in each class to 
be indefinite. Persons to be at liberty to subscribe on their own lives, or on 
those of others nominated by them. 

The annuity upon a share in the first class, to be $8.40 

Upon a share in the second, . 8.65 

Upon a share in the third, . 9.00 

Upon a share in the fourth, 9.65 

Upon a share in the fifth, . . . 10.70 

Upon a share in the sixth, ......... 12.80 

The annuities of those who die to be equally divided among the survivors, 
until four-fifths shall be dead, when the principle of survivorship shall cease, and 
each annuitant thenceforth enjoy his dividend as a several annuity during the life 
upon which it shall depend. 1 

No action was taken by Congress upon this ill-advised scheme; 
but it is important to observe that its details appear to have been 
adjusted upon the plan of the English tontine of 1789, which had 
been brought out by Mr. Pitt a few months before the date of 
Hamilton's report. 2 The classification of subscribers is the same 
in the two, differing from either of the other English tontines and 
from the Irish and French as well. 3 In short, it appears that, in 

1 "State Papers, Finance," i. 21. 

2 On June 10, 1789. See "Parliamentary History," xxviii. 161. 

8 The English tontine of 1789 was under the act of 29 George III., c. 41. A pay- 
ment appears to have been made to one survivor in the fiscal year 1887-1888, according to 
"Finance Accounts " (in Pari. Doc, 1888), p. 42. 

The annuities proposed by Hamilton were somewhat higher for classes four, five, and 
six than those in the English scheme. This change was probably made because the 
terms of the English tontine were found not to be sufficiently attractive, so that the sub- 
scription was not filled. See for this and other English and Irish tontines, " Report on 
Public Income and Expenditure" (Pari. Doc, 1869), ii. 571; for the French cases, 
Leroy-Beaulieu, "Science des Finances," ii. 288 [1st ed.]. 



PRECEDENTS FOLLOWED BY ALEXANDER HAMILTON 79 

his uncertainty as to the kind of investments which would prove 
acceptable in the United States, Hamilton here grasped at the 
freshest expedient brought to him by his foreign advices, commit- 
ting himself to a proposition which shows little of the business-like 
calculation found in most of his recommendations to Congress. 

It was no doubt a common belief among Hamilton's opponents 
that, in shaping these propositions, he had devised a scheme which 
threatened the country with a perpetual debt. This, it was charged, 
was the natural result of a weak deference to English precedent 
and of political theories of English origin, which looked to the 
strengthening of the central government by all possible influences, 
whether pure or mercenary. 1 That the concentration of debt and 
of revenue under federal authority would give instant support to 
the general policy of Hamilton and his party there was no pre- 
tence of denying, and it was perhaps natural that the opposition 
should believe that a debt which was used to strengthen the gov- 
ernment at the outset would be treated as one of its permanent 
buttresses. The magnitude of the funding operation tended to 
confirm this idea. That Hamilton's opponents had no definite 
counter-proposition 2 appears to have been due in great measure 
to the belief sometimes expressed, and sometimes tacitly operative, 
that the debt weighing upon the general and state governments 
together was too great to be dealt with. To fund the debts of the 
Confederation at their face, without any attempt at scaling them 
down, and to assume a great mass of debts incurred by the states 
for the common defence, was to bind a formidable burden upon 
a government which was then collecting an independent revenue 
for the first time. 3 What chance of ultimate redemption can there 

1 Jefferson, in his letter to Washington, September 9, 1792, says that Hamilton 
"wishes it [the debt] never to be paid, but always to be a thing wherewith to corrupt 
and manage the legislature." Jefferson's " Works," iii. 464. And twenty-five years 
later, writing the introduction to his " Anas," he says in a famous passage that Hamil- 
ton's financial system " had two objects : 1st, as a puzzle, to exclude popular understand- 
ing and inquiry ; 2nd, as a machine for the corruption of the legislature." Ibid., ix. 91. 

2 As an example of the suggestions made by individuals may be cited Maclay's 
advice, to establish a revenue sufficient " to discharge a reasonable interest, proportionate 
to the market price of the public debt, until the whole is extinguished by the western 
sales." " Debates in the First Senate," p. 259. Maclay's idea of " a reasonable interest " 
appears, from p. 171, to have been three per cent. 

8 Gallatin, in his " Sketch of the Finances " (1796), treats the ability of the govern- 
ment to carry this weight as something still to be proved. The objections to the assump- 



80 ESSAYS 

be, to what else than a permanent and probably increasing national 
debt can such a scheme be expected to lead ? was the anxious 
inquiry of men whom we have no right to charge with mere polit- 
ical hostility to Hamilton or with indifference to the national 
honor. A few years settled all such questions. The changed 
relations of the whole commercial world brought such an increase 
of national wealth as no man could have foreseen in 1790; and, 
by the irony of fate, it was Hamilton's opponents who reaped the 
benefit. 

Hamilton's answer to all such apprehensions and the effective 
justification of his policy are to be found in his habitually sanguine 
estimate of what might be expected from the growth of the 
country. In 1781 he wrote to Morris that, if the United States 
should succeed in the war, their population would double in thirty 
years, and they would be out of debt in twenty. 1 In his " Report 
on Public Credit," he thought that no country would be able 
to borrow from foreigners upon better terms than the United 
States, "because none can perhaps afford so good security." 2 He 
made his calculations, as we have seen, on an early fall in the 
rate of interest to be paid by the government. And he wished to 
hasten the rise of the national securities which he foresaw, in order 
that, if they should pass into the hands of foreigners, it might be 
for full value. 3 His optimism was, after all, the truest wisdom ; 
and it explains and justifies the boldness with which he fixed the 
scale of his funding system. In his view, the debt which was to 
be funded, so far from being a perpetual burden, would fall easily 
within the resources of the rising nation ; and, as it turned out, 
a still more confident policy might have succeeded. 

The legislation which he advised or procured was strictly con- 
sistent with this expectation of future growth. Threatening as 
his propositions appeared to his opponents, few men would now 
dispute the statement that he undertook to cast the debt in such 
form as to keep its redemption fairly within the control of the 

tion of state debts, he says, rest chiefly on the increase of the general debt and the 
difficulty of commanding all the resources of the country. " Give the Union that com- 
mand, prove that its ability of paying the principal of the debt is not impaired by having 
assumed the state debts, and the measure will stand almost justified." "Writings of 
Gallatin," iii. 165. 

1 " Works " (Lodge's edition), iii. 124. 

2 "State Papers, Finance," i. 20. 3 Ibid., p. 25. 



PRECEDENTS FOLLOWED BY ALEXANDER HAMILTON 8 1 

government, making the securities redeemable either at pleasure 
or at such a rate as might be supposed to correspond to the ability 
of a prosperous country. A quarter of a century ago the promise 
of a sinking fund of one per cent per annum appeared to Congress 
and to the public to be sufficient. 1 Less than twenty years ago 
a large part of the national debt was made irredeemable for thirty 
years ; and a period even longer was favored by men who were 
under no suspicion of favoring perpetual debt. With a scheme 
far removed then from perpetuity, as judged by recent standards, 
Hamilton undertook also to provide the machinery for carrying on 
systematic redemption even before the resources needed for the 
purpose could be counted on with certainty. So far, then, as the 
terms of his legislation are concerned, or those of the measures 
proposed by him, but not accepted by Congress, the charges made 
by his opponents appear to be without real foundation. 

It must be admitted, however, that Hamilton, when urging the, 
funding of the debt, sometimes used language which might well 
expose him to the charge of desiring its permanence and the sus- 
picion of aiming at its establishment on something like the Eng- 
lish model. He saw plainly that the revival of industry could 
only be accomplished by the aid of a sound mercantile credit, 
and that for the growth of this the establishment and regular 
operation of public credit were necessary. He saw the advantage 
which must accrue to the community when the resources of indi- 
viduals locked up in claims upon the government should become 
mobile, by being converted into negotiable securities having a 
recognized standing in the market. And he held the opinion, 
often expressed since his time, that under some conditions a 
diffused domestic debt may be a bond of union. In urging his 
plans, then, he set forth in strong terms these advantages to be 
gained from the funding system. He sometimes fell little short of 
declaring a funded debt to be a real increase of capital, although 
he did in fact make the distinction between an absolute increase of 
capital — which, he says, a funded debt is not — and a tendency to 
increase real wealth by increasing activity. 2 In his letter to Morris 

1 The operation of the sinking-fund provision of 1862 is of course much slackened 
by the construction which calls for one per cent., not of the original debt, but of the 
balance remaining unpaid at the beginning of the fiscal year. 

2 On this subject, see his " Report on Manufactures," in " State Papers, Finance," 
i. 132. 

G 



82 ESSAYS 

in 1 78 1 he had declared that a "national debt, if it is not exces- 
sive, will be to us a national blessing. It will be a powerful 
cement of the Union." a And in his " Report on Public Credit " 
he uses the same expression. 2 On this occasion, however, an 
explanation follows, which shows us his real thought. " Persuaded 
as the Secretary is that the proper funding of the present debt will 
render ii: a national blessing, yet he is so far from acceding to the 
position, in the latitude in which it is sometimes laid down, that 
public debts are public benefits, a position inviting to prodigality 
and liable to dangerous abuse, that he ardently wishes to see it 
incorporated, as a fundamental maxim, in the system of public 
credit of the United States, that the creation of debt should always 
be accompanied with the means of extinguishment." This decla- 
ration, not standing alone, but repeated on other occasions, 3 places 
his opinion as to national debts on consistent and easily de- 
fensible grounds. How far it fell in with the English practice 
of the day can best be seen when we consider the measures which 
Hamilton took to secure the regular payment of the debt the 
United States funded by the act of 1790. 

Coming, then, to the second of Hamilton's leading measures, 
the establishment of a sinking fund for the national debt, we find 
an expedient unmistakably adopted from English legislation, — 
so clearly derived from that source, in fact, that it would not call 
for discussion here if the meaning of the English precedent had 
not sometimes been lost sight of, and the key to Hamilton's action 
therefore lost. Without doubt, Hamilton in this matter followed 
Mr. Pitt. 4 What, then, was the scheme of Pitt? This question 

1 "Works" (Lodge's edition), iii. 124. 

2 " State Papers, Finance," i. 24. Jefferson fastened upon this famous phrase, and 
in his letter to Eppes, November 6, 181 3, remarks that at " the time we were funding our 
national debts we heard much about 'a public debt being a public blessing'; that the 
stock representing it was a creation of active capital for the aliment of commerce, manu- 
factures, and agriculture. This paradox was well adapted to the minds of believers in 
dreams, and the gulls of that sort entered bona fide into it." Jefferson's " Works," vi. 239. 

3 See especially his "Report on Public Credit" of January, 1795, "State Papers, 
Finance," i. 331, 332. 

4 A committee consisting of Hamilton, Madison, and Fitzsimons reported to Con- 
gress a resolution, December 16, 1782, declaring that any excess of funds granted by the 
states for the support of the debt should be inviolably appropriated as a sinking fund for 
the payment of the principal. Journal of Congress, viii. 38. Whether Hamilton was 
the author of the resolution or not, it does not conflict with the above statement of his 
indebtedness to Pitt. 



PRECEDENTS FOLLOWED BY ALEXANDER HAMILTON 83 

is not to be answered by referring to the English sinking fund, 
such as it became under later legislation in the years from which 
most of the current impressions about it date. We must go back 
to Mr. Pitt's sinking fund act of 1786, that being the legislation 
actually before Hamilton when he adopted his policy, and not yet 
modified even by Pitt's act of 1792, when the act of Congress of 
that year gave to our system its more formal organization. 

Having a sufficient surplus of revenue in 1 786, and, as was then 
believed, the prospect of a long peace, Mr. Pitt carried through 
Parliament an act 1 appropriating .£250,000 quarterly to be ex- 
pended in the purchase of government securities, and providing 
that the interest on securities purchased should also be so expended, 
all under the direction of a board of commissioners of high rank, 
the accumulation to continue until such time as the commissioners 
should hold securities yielding a clear income of four millions, 
beyond which point, distant by calculation about twenty-eight 
years, the interest on further purchases should be stopped, and 
its amount made available for the relief of taxpayers. This sink- 
ing fund of one million per annum, it is to be observed, was by the 
terms of the act applicable to "the present public debt," of which 
the estimated capital was a little over £238,000,000. After all, 
however, Mr. Pitt looked to excess of income over expenditure as 
the means of payment; and the dazzling results of compound 
interest, often drawn from Dr. Price's popular calculations, 2 were 
only significant of the rate at which a given surplus might be 
made to act, and not indicative of any new power of extinguish- 
ment. Forced in 1792 to meet the possibility of extraordinary 
expenditures which might require fresh loans, Mr. Pitt carried 
through an additional act, 3 providing that every future loan should 

1 26 George III., c. 31. 

2 Dr. Price's " Appeal to the Public on the Subject of the National Debt " was 
published in 1772, and had been followed by other pamphlets on the same subject before 
1786, when Mr. Pitt accepted his authority. Dr. Price was favorably known in the United 
States ; for in 1778 Congress invited him to come to this country and take charge of the 
finances. " Diplomatic Correspondence of the Revolution," iii. 64. And as by the 
edition of his "Observations on Reversionary Payments" in 1783 he had thrown new 
light on the subject of life annuities, it is a little singular that Hamilton passes him by in 
silence, using the old tables of Halley for his calculations on annuities. "American 
State Papers, Finance," i. 32. 

8 32 George III., c. 55. For a review of Mr. Pitt's legislation on this subject, see 
Mr. Huskisson's speech of March 25, 1813, Hansard's " Parliamentary Debates," xxv. 287. 



84 ESSAYS 

be accompanied by fresh taxation sufficient to meet its interest and 
to provide a sinking fund of one per cent per annum for its capi- 
tal, so that it might be extinguished in thirty or forty years, 1 accord- 
ing to the rate at which purchases could be made for that purpose. 
The act of 1792, however, merely carried out the plain intent of 
the act of 1786, that every funded debt should have the means pro- 
vided for the steady extinguishment of its principal. The machin- 
ery of the acts, the establishment of a board of commissioners to 
apply the income of the fund for this purpose and to invest the 
interest earned upon its accumulations, was a device for holding 
Parliament to the policy which it had undertaken ; and the high 
rank of the commissioners was relied upon as a protection against 
legislative tampering. Under all the legislation down to 1802 2 
Mr. Pitt's sinking-fund system, stripped of its formalities, was as 
nearly as possible that which states and corporations not infre- 
quently adopt in our own day. It was not illusory in its financial 
provisions, nor even in its dependence on the chances of war or 
peace. It did rest, however, upon a complete illusion as to the 
possibility of holding Parliament permanently to the system — as 
to the possibility, that is, of binding the debtor by a compact made 
with himself. 3 

This political defect of Mr. Pitt's measure was not disclosed, 
however, during Hamilton's administration. Especially in the 
years 1 789-1 792, the English exchequer was working on a peace 

1 Ricardo says "under the most unfavorable circumstances in forty-five years." 
" Works," p. 524. 2 42 George III., c. 71. 

3 In Ricardo's hard-headed " Essay on the Funding System " he declares that " it 
will not . . . admit of a doubt that, if Mr. Pitt's sinking fund, as established in 1792, 
had been always fairly acted upon, — if, for every loan, in addition to the war taxes, the 
interest and a one per cent sinking fund had been invariably supplied by annual taxes, — 
we should have made rapid progress in the extinction of debt." " Works," p. 531. But 
" Mr. Pitt flattered himself most strangely. . . . With the knowledge of Parliament 
which he had, it is surprising that he should have relied so firmly on the resistance which 
the House of Commons would offer to any plan of ministers for violating the sinking 
fund." Ibid., p. 543. In its actual operation under later legislation, Ricardo thought the 
sinking fund had increased debt rather than diminished it, and so concludes " that no 
securities can be given by ministers that the sinking fund shall be faithfully devoted to 
the payment of debt, and without such securities we should be much better without such 
a fund." Ibid., p. 545. 

For Lord Stanhope's attempt to make the sinking fund a part of a fresh contract 
with the fund-holders, see the debate in the House of Lords, May 22, 1786. " Hansard," 
xxvi. 17. 



PRECEDENTS FOLLOWED BY ALEXANDER HAMILTON 85 

footing, and the sinking fund was therefore the last new thing in 
finance and full of promise, when Hamilton organized his financial 
system, and adopted, as a fundamental maxim, " that the creation of 
debt should always be accompanied with the means of extinguish- 
ment." The application of this maxim made it essential that with 
the funding of the debt should be joined some plan for finally sink- 
ing the principal. In his " Report on Public Credit," then, Hamil- 
ton proposed the establishment of a Board of Commissioners, 
composed, like Pitt's, of high officers of state, 1 in whom should be 
vested the control of a fund, to be applied to the purchase or pay- 
ment of debt, and to continue so vested until the whole of the debt 
should be discharged; and he also proposed the contraction of a 
new loan by the commissioners, its proceeds to be applicable chiefly 
to the payment of matured foreign debt and to the purchase of public 
securities below par, it being, in his opinion, an important object 
both to raise the value of the public stock in the market and to 
secure for the government the profits of such a reinvestment. 
Waiving the proposition for a new loan and its application, it is 
clear that Hamilton had in mind the establishment of an organized 
sinking fund. The embarrassment was in finding the means for 
feeding it, in the untried resources of the new government. He 
proposed to devote for this purpose the net produce of the post- 
office, to an amount not exceeding one million dollars, to be used 
in purchases, and so to serve as a nucleus for a growing fund. 
Congress, however, besides a general appropriation of the pro- 
ceeds of Western lands for sinking the existing debts of the United 
States, 2 preferred to use for this purpose the surplus of revenue 
which might remain at the end of the year 1790, owing its exist- 
ence to the funding of interest on the domestic debt of the United 
States to that date. 3 This appropriation was not perfected by any 

1 Pitt's commissioners, under the act of 1786, were the Speaker of the House of 
Commons, the Chancellor of the Exchequer, the Master of the Rolls, the Accountant- 
General of the Court of Chancery, the Governor and the Deputy Governor of the Bank 
of England. Hamilton proposed as commissioners the President of the Senate, the 
Speaker of the House of Representatives, the Chief Justice, the Secretary of the 
Treasury, and the Attorney-General. Congress, by the act of August 12, 1790, § 2, 
added the Secretary of State, and struck out the Speaker of the House. " Statutes at 
Large," i. 186. 

2 Act of August 4, 1790, § 22, " Statutes at Large," i. 144. 

3 This surplus is reported, February 1, 1793, to have amounted to $1,374,656. 
"State Papers, Finance," i. 219. 



86 ESSAYS 

provision for the investment of the interest accruing on stock pur- 
chased by the commissioners, so that the act of 1790 for the reduc- 
tion of the public debt went no farther than the mere establishment 
of a commission, not provided with any permanent resource what- 
ever. 1 Hence the necessity for the recommendations made by 
Hamilton in his report of January 23, 1792, when, evidently in pur- 
suance of his original conception, he advised that the interest on 
so much debt as might at any time have been purchased or paid by 
the commissioners should itself be appropriated for further pay- 
ments or purchases. " It will deserve the consideration of the legis- 
lature," he added, "whether this fund ought not to be so vested as 
to acquire the nature and quality of a proprietary trust, incapable of 
being diverted without a violation of the principles and sanctions 
of property." 2 The act which carried out this recommendation as to 
the investment of interest accruing on previous purchases, 3 although 
it does not use the term "sinking fund," in fact created such a 
fund for the then existing debt of the United States, on precisely 
the model of Pitt's sinking fund of 1786 ; 4 and it must be added that, 
although the act of 1795 and Gallatin's act of 1802 differed from 
this model in form, they both in fact depended for their efficacy 
upon the same essential principle, — the compounding of interest 
by the investment of interest accruing on purchases already made. 
We have seen that Pitt in 1786 relied imprudently on the good 
resolutions of future Parliaments. Hamilton, by the peculiar form 
which had been given to a large part of the debt of the United 
States, was enabled to secure a much more solid safeguard for the 
uninterrupted working of his sinking fund. The six per cent 
debt of the United States had been made reimbursable by pay- 
ments not exceeding eight dollars upon a hundred in any one year 
for both principal and interest. The act of 1792 had contemplated 
the redemption of this stock when the whole annual income of the 
sinking fund should have reached two per cent of the whole 
amount of the stock outstanding, and had declared the interest 

1 See act of August 12, 1790, " Statutes at Large," i. 186. 

2 " State Papers, Finance," i. 148. 

3 Act of May 8, 1792, §§ 6, 7, " Statutes at Large," i. 282. 

4 The term " sinking fund " does not appear in the legislation until the act of 
March 3, 1795. The commissioners, however, in their journal, appear to have called 
themselves " Commissioners of the Sinking Fund of the United States " as early as 
August, 1 791. "State Papers, Finance," i. 235. 



PRECEDENTS FOLLOWED BY ALEXANDER HAMILTON 87 

accruing on stock held in the sinking fund to be " appropriated 
and pledged firmly and inviolably " for this purpose. But, in his 
elaborate report of January, 1795, 1 Hamilton, dealing with larger 
revenues and brighter prospects, recommended an addition to the 
income of the sinking fund of so much of the proceeds of duties 
on imports and tonnage and of excise as would suffice to begin at 
once the redemption of the six per cents bearing a present inter- 
est; and so much of the same revenues as, with the dividends 
accruing to the government from the United States Bank, would 
complete the payment for the bank stock and enable the redemp- 
tion of the deferred six per cents to begin in 1802. These recom- 
mendations, with others strengthening the organization of the 
sinking fund, were adopted by Congress. The appropriation of 
the revenues and resources in question was made permanent 
" until the whole of the present debt of the United States " should 
be reimbursed; "and the faith of the United States is hereby 
pledged that the income or funds aforesaid shall inviolably remain, 
and be appropriated and vested as aforesaid, to be applied to the 
said reimbursement and redemption in manner aforesaid until the 
same shall be fully and completely effected." 2 Under these 
provisions, the redemption of the six per cent stock began from 
January 1, 1795, by a series of payments fixed at eight per cent 
per annum for principal and interest ; and the stock was thus con- 
verted from an ordinary six per cent of indefinite duration " into 
an annuity of eight per cent per annum for a period of somewhat 
less than twenty-four years." Hamilton, in proposing this devo- 
tion of revenue to the redemption of debt, had intended to make 
the arrangement a contract with creditors, not to be violated. 
" The intent is to secure, by all the sanctions of which the subject 
is susceptible, an inviolable application of the fund, according to 
its destination. No expedients more powerful can be devised for 
this purpose than to clothe it with the character of private property 
and to engage absolutely the faith of the government by making 
the application of it to the object a part of 'the contract with the 
creditors." 3 Wolcott, Hamilton's successor, in his communication 

1 " State Papers, Finance," i. 320. 

2 Act of March 3, 1795, § 9, " Statutes at Large," i. 435. 

3 " State Papers, Finance," i. 332. A little farther on is a plain allusion to the diver- 
sion of the English sinking fund from its purpose prior to the act of 1786. 



88 ESSAYS 

to the House, January 26, 1796, 1 observed that, "as the injunc- 
tions of the law upon the commissioners of the sinking fund are 
unconditional, and as permanent funds have been vested and 
appropriated, it is conceived that a successive reimbursement 
annually of the debt before mentioned has become an irrevocable 
stipulation with the creditors." Gallatin also recognized a pledge 
of the public faith in this action; and the change made in the 
sinking fund legislation by his advice in 1802 2 carefully saved all 
rights of creditors under previous acts, and he and his successors 
therefore continued, in war as well as in peace, the reimbursement 
undertaken in 1795. 3 

The idea, then, which Hamilton had in common with Pitt, and 
of which Pitt's action was the practical illustration, was to couple 
with every debt the means for its extinguishment, 4 to be applied 
to that purpose, whatever the condition of the Treasury otherwise. 
This could not prevent debt from accumulating, if expenditure was 
excessive ; but it insured the good credit of the loans to which the 
plan was applied, and the system, if adhered to, tended to keep 
constantly before the legislature the necessity of having a stated 
revenue above ordinary expenses. The application of this idea to 
an existing debt Hamilton was able to provide for more effectively 
than Pitt, owing to the peculiar form given to the obligations of 
the United States ; but in neither case did it prove to be possible 
to guarantee sufficient provision for such fresh expenditure or debt 
as the legislative will might insist upon. Less than justice has 
usually been done to the common sense of both of these great 
statesmen. There is nothing to show that either of them in adopt- 
ing his system had any delusion as to the impossibility of paying 
debt without money, or any notion that compound interest could 

1 " State Papers, Finance," i. p. 381. 

2 Act of April 29, 1802, " Statutes at Large," ii. 167. See especially §§ 3, 7. 

8 For the rate at which stated payments of eight per cent per annum extinguished 
the capital as well as defrayed the interest, see the table given by Wolcott, " State 
Papers, Finance," i. 405 ; compare also the act of April 28, 1796, § I. Inspection of 
the table shows the application of the compound interest. Obviously, Gallatin's system 
of devoting a fixed sum for interest and redemption of principal together, thus increasing 
the payment of principal as the sum required for interest diminished, was an application 
of the same method to the whole debt instead of to a particular part thereof. 

4 Hamilton's "Report on Public Credit" of 1795 gives in a foot-note a significant 
reference to this provision of the English act of 1 792. See " State Papers, Finance," 
i.331. 



PRECEDENTS FOLLOWED BY ALEXANDER HAMILTON 89 

be made to supply the place of an adequate revenue or even to 
conceal its absence. Pitt, at the time when Hamilton took him as 
his example, had a surplus ; and Hamilton hoped for one, and 
upon good grounds. Apply this surplus effectively to present 
debt, and then contract no more without at the same time making 
provision from new sources for its interest and ultimate payment, 
— this was the system on which both proceeded. In the one case 
the system was swamped by the gigantic wars of the French 
Revolution ; in the other it was made useless by the astonishing 
growth of national revenue ; but in neither case, under the con- 
ditions and for the purposes of the time, was it the pure folly 
which it is often represented to have been. 

The third point in Hamilton's financial system which we have 
to consider here is the establishment of a Bank of the United 
States. This measure was referred to by Hamilton in his " Report 
on Public Credit " as a part of his scheme not then fully matured, 
and was presented in form in December, 1790, under a resolution 
of the House adopted in the previous August, calling upon the 
Secretary to report " such further provisions as may, in his opinion, 
be necessary for establishing the public credit." In stating the 
advantages to be gained from a bank he dwelt especially on the 
influence of a bank in quickening and virtually increasing the pro- 
ductive capital of the country and its utility as a financial agency 
of the government. It was then not far from eleven years since 
the probable date of his draft of a letter to Morris 1 urging the 
establishment of a Bank of the United States by the Confederation, 
and not far from ten years since his letters to Duane, Sears, and 
again to Morris, discussing and enforcing a similar proposition. 
The claim of priority in the conception of a national bank, which 
has been rested on these letters, is hardly a valuable one. The 
letters were written at the moment when the continental paper had 

~ 1 The draft of a letter to Morris, Hamilton's "Works" (Lodge's edition), iii. 61, is 
inserted in the earlier edition of the " Works," i. 1 1 6, as if written between December, 
1779, and March 17, 1780. A few important blanks are left in it to be rilled later, and 
the manuscript is said to be otherwise defective. It seems not to have been referred to 
in subsequent correspondence between Hamilton and Morris, and may then perhaps be 
the draft of an intended letter, never sent, but interesting as showing the state of Hamil- 
ton's opinions on the subject when he was twenty-three years old. If sent, the letter 
was intended to be anonymous, as appears from its last paragraph. 



7 



90 ESSAYS 

become practically worthless, and Congress was at its wits' end. 
The schemes proposed by Hamilton were perhaps no wilder than 
were offered by others, but he would have been slow in 1790 to 
recognize their affinity with the maturely deliberated proposition 
of that year. It is enough to say that the second and more care- 
fully elaborated of the letters to Morris 1 proposes a bank, the 
stock of which, to the extent of at least one-third, might be paid 
for in landed security, the notes of 20s. and upward to bear inter- 
est, and the places of redemption to be in the interior, making 
" applications for payment of bank-notes less convenient." 2 
Among the advantages of the scheme, besides the loans to be 
made to Congress, was the familiar attraction of all land-bank 
schemes, that proprietors could have the use of their land and also 
the use of a cash representative of its value. 3 

The earlier schemes, however, mark the length of time for 
which Hamilton's mind had been busied with the idea of securing 
financial relief from a great banking institution of some sort ; 4 and 
his letters show his interest in the working of the great European 
banks. Of these there was but one which could be an available 
model. The French Caisse d'Escompte was embarrassed by its 
close connection with the government, hardly tried to conceal the 
real inconvertibility of its paper, and was fast approaching ruin. 
The Bank of Amsterdam, still in good credit, was organized upon 
a plan adapted only for an opulent community, rich in specie, and 
indifferent to the use of bank credit in its usual forms. There 
remained the Bank of England, a successful institution, strengthen- 
ing private enterprise, aiding the government, 5 and regulating cur- 
rency upon a sound basis. Without presenting this formally as 

1 April 30, 1781, Hamilton's "Works" (Lodge's edition), iii. 82. 

2 Ibid., p. 118. 3 Ibid., p. 107. 

4 The constitution of the Bank of New York, adopted March 15, 1784, given by 
Domett, " History of the Bank of New York," p. 11, was written by Hamilton, but con- 
tains little except the formal provisions necessary for determining the duties and respon- 
sibilities of officers, rights of stockholders, and other details incident to the organization 
of a moneyed institution. The act of incorporation {Ibid., p. 122), passed March 21, 
1791, contains, however, a series of provisions relating to the banking powers of the 
corporation, which follow closely even the phraseology of the act passed by Congress a 
month before, establishing the Bank of the United States. 

5 In 1 781, Hamilton, writing to Morris, and referring to the Bank of England, says, 
"'Tis by this alone she [England] now menaces our independence." " Works " (Lodge's 
edition), iii. 101. 



PRECEDENTS FOLLOWED BY ALEXANDER HAMILTON 91 

an example, 1 he shaped his own proposition according to the lines 
of the Bank of England, with the changes which the circumstances 
of the United States required. 

The primary question as to the connection of the government 
with the proposed bank is argued and settled by Hamilton in his 
report in accordance with the English precedent and directly 
against the other European cases. He concludes in favor of an 
institution in private hands and under private direction, and to be 
influenced as little as possible by public necessity. "The keen, 
steady, and, as it were, magnetic sense of their own interest as 
proprietors, in the direction of a bank, pointing invariably to its 
true pole, the prosperity of the institution, is the only security 
that can always be relied upon for a careful and prudent adminis- 
tration." No profit to be gained by the state from banking could 
in his mind be set against this advantage. The state might be an 
owner of stock, though not of a principal part of it, and ought to 
exercise a supervision for the good of the community; but he 
admitted no real departure from the theory of the Bank of Eng- 
land as an essentially private establishment employed as a public 
agent. This independence of the executive he secured by forbid- 
ding loans of serious amount for the use of the government, unless 
specially authorized by law, as was done by the Bank of England 
charter until the passage of Mr. Pitt's act in 1793. 2 As for the 
holding of public securities as an investment of the capital of the 
bank, Hamilton was establishing his bank in the presence of a debt 
already contracted, instead of using it as a means of borrowing, as 
the Bank of England had been used. It was enough for his pur- 
pose, then, to allow three-fourths of the stock to be paid for by 
transfer of public securities, these to be held until the needs of the 
bank might require their sale. 

It has been remarked already that for Hamilton's purposes a 
bank was needed of a different kind from the Bank of Amsterdam. 
A bank of discount, deposit, and issue was required for the trans- 
action of general business, public and private. In the summary 

1 The Bank of England is not mentioned in the " Report on a National Bank," ex- 
cept in a passage near the beginning, where Hamilton says that public banks have suc- 
cessively obtained in Italy, Germany, Holland, England, and France, as well as in the 
United States. The omission appears to be studied. 

2 33 George III., c. 32. See McLeod, "Theory and Practice of Banking," i. 445. 



92 ESSAYS 

of his plan given in his report, Hamilton makes a brief statement 
as to the powers of the proposed bank as follows : — 

VII. The company may sell or demise its lands and tenements, or may sell 
the whole or any part of the public debt, whereof its stock shall consist, but shall 
trade in nothing except bills of exchange, gold and silver bullion, or in the sale 
of goods pledged for money lent, nor shall take more than at the rate of six per 
centum per annum upon its loans or discounts. 

The bill offered in the Senate was drawn by Hamilton and, 
with few changes, became a law, and we there find this important 
provision amplified in terms which may fairly be set side by side 
with a similar provision in the Bank of England Act of 1694. 

[Act of February 25, 1791.] [Act of $ Will, and Mary, c. 20.] 

The said corporation may sell any § xxvii. [That the corporation shall 

part of the public debt whereof its stock not deal in Goods, Wares, or Merchan- 

shall be composed, but shall not be at dise.] § xxviii. Provided, That noth- 

liberty to purchase any public debt ing herein contained shall in any ways 

whatsoever ; nor shall directly or in- be construed to hinder the said Corpora- 

directly deal or trade in anything, ex- tion from dealing in Bills of Exchange, 

cept bills of exchange, gold or silver or in buying or selling Bullion, Gold or 

bullion, or in the sale of goods really Silver, or in selling any Goods, Wares, 

and truly pledged for money lent and or Merchandise whatsoever, which shall 

not redeemed in due time ; or of goods really and bona fide be left or deposited 

which shall be the produce of its lands, with the said Corporation for Money 

Neither shall the said corporation take lent and advanced thereon, and which 

more than at the rate of six per centum shall not be redeemed at the Time 

per annum, for or upon its loans or dis- agreed on, or within three Months after, 

counts. or from selling such Goods as shall or 

may be the Produce of Lands purchased 
by the said Corporation. 

Other passages also might be cited to show that the framer of 
the act incorporating the Bank of the United States had the Eng- 
lish acts open before him ; but, after all, the important fact is that 
in both there was the same purpose of establishing a private com- 
pany with general banking powers, to cooperate with the Treas- 
ury. The limits and safeguards thrown around the use of these 
powers were few in both cases, with differences mainly to be 
accounted for by differing conditions. In each, the redemption of 
notes in specie was required ; and the amount of the issue was 
limited in the charter of the Bank of England by forbidding debts 
in excess of the capital, and in the charter of the Bank of the 



PRECEDENTS FOLLOWED BY ALEXANDER HAMILTON 93 

United States by forbidding the debts exclusive of deposits to 
exceed the capital. The prohibition of investment in real estate 
was inserted by Hamilton, 1 and with good reason, considering the 
condition of the United States at that date. 

Closing here the present examination of Hamilton's system, it 
must be added, in order to avoid misconception, that it is in the 
grouping of these measures so as to make a consistent scheme for 
the accomplishment of a definite purpose that we find Hamilton's 
best title to rank as a great financial statesman. He had the 
insight and cheerful resolution which enabled him to see and draw 
out the still latent strength of the new country, the knowledge of 
the world necessary for bringing together the best of tried expedi- 
ents, and the breadth of conception required for shaping a system 
which should make growth rapid and burdens lighter, by the 
creation of public and private credit. No statesman could have a 
greater task set for him, and political science can hardly have in 
store any greater triumph than this application of the experience 
of other men and other nations. Details may be criticised, and 
yet as a whole his measures meet the real test of financial sound- 
ness, representing in their great features the best that could be 
done under the conditions then existing. And in this as in other 
parts of our political system his impress was lasting. " The results, 
legislative and administrative," says the biographer of his greatest 
successor, " were stupendous and can never be repeated. A gov- 
ernment is organized once for all, and until that of the United 
States fairly goes to pieces no man can do more than alter or 
improve the work accomplished by Hamilton and his party." 

1 Hamilton's letter to Church, March 10, 1784, condemns Chancellor Livingston's 
scheme of a land bank, and shows that Hamilton had then outgrown the ideas expressed 
in his letter to Morris in 1781. See Hamilton's "Works" (J. C. Hamilton's edition), 
i. 4H. 






THE DIRECT TAX OF 1861 1 

The direct tax laid by the act of Congress of August 5, 1861, 
was the fifth levy which has been made under the provisions of 
the Constitution, requiring that " representation and direct taxes 
shall be apportioned among the several states . . . according to 
their respective numbers." There would be little risk in predict- 
ing that this will also be the last resort to a method of taxation 
which the framers of the Constitution thought important enough 
to hold a place in one of the difficult compromises embodied in that 
instrument. The insufficiency of the method for revenue purposes, 
the confusion which has arisen as to the meaning and incidence 
of a direct tax under the Constitution, the extraordinary inequali- 
ties which grew out of the circumstances under which the last levy 
was made, and the really insoluble questions raised as to the effect 
which refunding the tax would have in mitigating or aggravating 
those inequalities, make it altogether probable that, in any future 
stress of fortune, relief for the Treasury will be sought anywhere 
else rather than in a resort to thisjiiscredited source. \ 

The phrase " direct taxation " appears to have been introduced 
in the Convention of 1787 by Gouverneur Morris, on July 12, 2 
when he made the motion, which was carried, " that direct taxation 
ought to be proportioned to representation." The Convention, per- 
haps, had no clear opinion as to the precise meaning of the words 
here used ; 3 but it is plain that Morris had in mind some well- 
marked distinction between direct and indirect taxes. He had 
proposed at first simply that ''taxation shall be in proportion to 

1 Quarterly Journal of Economics, July, 1 889. 

2 The use of the same expression in what purports to be the draft of a Constitution 
offered by Mr. Pinckney, May 29, need not be considered, in view of the plainly garbled 
text of that document. Elliot, "Debates," v. 130, 578. 

3 Thus, on August 20, when the report of the Committee of Detail was under dis- 
cussion, " Mr. King asked what was the precise meaning of direct taxation. No one 
answered." " Madison's Debates," in Elliot, v. 451. 

94 



K 



THE DIRECT TAX OF 1861 95 

representation." To this it was objected that, although just, this 
plan might be embarrassing and " might drive the legislature to 
the plan of requisitions " ; and Morris thereupon, admitting that 
objections were possible, "supposed they would be removed by 
restraining the rule to direct taxation. With regard to indirect 
taxes on exports and imports and on consumption, the rule would 
be inapplicable." Wilson also saw no way of carrying Morris's 
plan into execution, " unless restrained to direct taxation " ; and 
Morris then modified his motion, with the result that the phrase 
"direct taxes" passed into the Constitution. 1 It is clear that in 
Morris's understanding, and in Wilson's as well, none but direct 
taxes could be levied by an apportionment among the states, the 
others named requiring to be laid by a general rate. 

From what source, then, did Morris and Wilson derive this 
classification, which set down as direct certain taxes having this 
convenient characteristic of being readily apportioned among the 
states ? The answer to this question is, no doubt, to be found in 
Hamilton's suggestion that the writings of the French economists 
of the eighteenth century were the source. 2 The doctrine that 
agriculture is the only productive employment, and that the net 
product from land, to be found in the hands of the landowner, is 
the only fund from which taxation can draw without impoverishing 
society, led them habitually to class taxes as direct, when laid im- 
mediately upon the landowner, and as indirect, when laid upon 
somebody else, but in their opinion destined to be borne ultimately 
by the landowner. This distinction between direct and indirect 
taxation, resting upon the supposed method of incidence upon 
a single class of persons, is fully developed and used by Quesnay, 
Mercier de la Riviere, Dupont de Nemours, and Turgot. It was 
a necessary result of their reasoning, became familiar in all the 
discussions of the school in France, and, we can hardly doubt, was 
carried to the knowledge of readers in political science in other 
countries, during the short-lived preeminence of the Physiocrats. 3 

1 Elliot, v. 302. 

2 See his brief as counsel for the United States in the Carriage Tax case, Hylton v. 
United States, Hamilton's "Works," vii. 845. 

3 Adam Smith did not adopt their use of direct and indirect, because he rejected 
the reasoning on which it rested ; and he does not appear to have formally classified 
taxes under these heads upon any other principle, although he occasionally uses the 
terms " direct," " directly," and their opposites, with a near approach to their modern use. 



96 ESSAYS 

As for the kind of taxes to be classed as direct, there was not 
complete agreement. Necessarily, taxes upon land or its returns 
were set down as direct taxes, and so, too, taxes upon commodities, 
or consumption, were called indirect. Taxes upon persons, how- 
ever, do not appear to be regarded by Quesnay, Dupont de Ne- 
mours, or Mercier de la Riviere as direct. The writer last named, 
after saying that the fund for taxation is in the hands of the land- 
owner, and that to draw from it otherwise than directly is a sub- 
version of the natural order of society, lays down the principle that 
" la forme de l'impot est indirecte lorsqu'il est etabli ou sur les 
personnes-memes ou sur les choses commerciables." 1 In Turgot's 
writings, however, we find taxes upon persons occasionally classed 
as direct. Thus, in his " Plan d'un Memoire sur les Imposi- 
tions," 2 he says of the forms of taxation : — 

II n'y en a que trois possibles : — 

La directe sur les fonds. 

La directe sur les personnes, qui devient un impot sur rexploitation. 

L'imposition indirecte, ou sur les consoramations. 

And in the fragment which we have of his " Comparaison de 
lTmpot sur le Revenu des Proprietaires et de lTmpot sur les Con- 
sommations," 3 a memoir prepared for the use of Franklin, a careful 
analysis of the same purport is made, although the point of formal 
classification is not reached. Of all writers upon economics in 
1787, 4 Turgot was perhaps the one most likely to have the ear of 
American readers ; and, of Americans, Gouverneur Morris and 
James Wilson were as likely as any to give him their attention. 
The former had already formed that familiar acquaintance with 
French literature and politics which made possible his singular 
career in Paris a few years later, and Wilson had been from 1779 
to 1783 accredited as advocate-general of the French nation in the 
United States. There was, then, an easy and a probable French 

1 " L'Ordre Naturel des Societes Politiques," in Daire's " Physiocrat es," p. 474. For 
Quesnay's use of the terms in question, see Daire, i. 83, 127; and for Dupont de 
Nemours', ibid., ii. 354-358. 

2 Daire, i. 394 ; and see also 396. 

3 Daire, i. 409. 

4 Dupont de Nemours published his " Memoires sur la Vie et les Ouvrages de M. 
Turgot" (i6mo, 2 parts, pp. 156 and 216) in Philadelphia and Paris, in 1782, the year 
after Turgot's death. See Hildeburn, " Issues of the Press in Pennsylvania." 



THE DIRECT TAX OF 1861 97 

source for the meaning which they both attached to the phrase 
introduced by Morris. 

It is to be observed, also, that there were some well-known 
precedents for levying by apportionment such taxes as those which 
Morris and Wilson probably had in mind. The French taille reelle, 
a tax on the income of real property, was laid by apportioning a 
fixed sum among the provinces and requiring from each its quota, 
as has been the practice in levying its substitute, the impot fonder, 
ever since 1790. The capitation was also levied in France, before 
the Revolution, in the same manner. The English land tax, estab- 
lished under William III., had for ninety years presented an ex- 
ample of apportionment among counties and other subdivisions, 
leaving the rate for each locality to be settled at the point neces- 
sary to give the due quota. Other contemporary examples could 
easily be cited; but these are enough for the present purpose, 
being necessarily familiar in this country in 1787, and likely to 
have a strong influence. 1 

The meaning of the phrase " direct taxation," as to which Rufus 
King vainly sought for light, was judicially considered in the well- 
known Carriage Tax case, Hylton v. United States, in 1796. The 
case had been heard in the circuit court by Wilson, who was then 
one of the associate justices of the Supreme Court; and, when his 
judgment in the lower court was affirmed by the full bench, he 
contented himself with a bare statement of assent, so that we lose 
what would have been the most interesting and perhaps the most 
important opinion of all. The judgment of the court, declaring 
that a tax upon carriages is not a direct tax within the meaning of 
the Constitution, was supported by considerations which showed 
a strong disposition to limit the definition of direct taxes so as 
to include only capitation and land taxes. Mr. Justice Paterson, 
indeed, suggested personal property by general valuation as a 
possible additional subject of direct taxation, the practicability of 
apportionment having already been accepted as a test of the proper 
meaning of the term ; but he thought the question difficult, and 

1 For the taille and capitation, see Pizard, "La France en 1789," p. 257 ; De Parieu, 
"Traite de PImpot," i. 224, 153. The act of 1763, apportioning the English land tax, is 
given in full in Ruff head's " Statutes at Large," ix. 78. The text of the acts of William 
Ill.is found in the Rolls edition of the statutes. See also Dowell, " History of Taxation 
and Taxes in England," iii. 94-97. 
11 



98 ESSAYS 

added that he never entertained a doubt that the principal — he 
would not say the only — objects contemplated by the framers of 
the Constitution were a capitation tax and a tax on land. Wolcott 
in his report upon "Direct Taxes," in December, 1 1796, took no 
notice of the decision by the Supreme Court a few months before, 
but, fci reasons of expediency, concluded that the objects of direct 
taxation should be limited to lands, houses, and slaves ; and they 
accordingly were thus limited by Congress in the acts of 1798, 
under which the first direct tax was levied. When the question 
came before the Supreme Court again in the case of Veazie Bank 
v. Fenno? Chief Justice Chase referred, with some doubt, to Pater- 
son's suggestion as to a tax on personal property by general valua- 
tion, but remarked that, in the practical construction of the Consti- 
tution by Congress, direct taxes had been limited to land and 
capitation taxes, and that this construction was entitled to great 
consideration in the absence of anything adverse to it in the dis- 
cussions of the federal convention or of the state conventions 
which ratified the Constitution. Finally, when the whole subject 
was reviewed in the case of Springer v. United States? Mr. Justice 
Swayne, giving the opinion of the court, declared it to be their 
conclusion " that direct taxes, within the meaning of the Constitu- 
tion, are only capitation taxes, as expressed in that instrument, and 
taxes on real estate." The judicial interpretation of the phrase, 
" direct taxes," is well settled therefore, 4 and in close accordance 
with the usage found in the writings of the French economists of 
the last century. 

The acts of 1798 5 established the general plan on which all 
succeeding direct taxes have been levied. These acts apportioned 
the total sum of two millions of dollars among the states, divided 
them all into convenient divisions, placed every division under a 
commissioner, and provided the requisite array of principal and 

1 " State Papers on Finance," i. 414. 2 8 Wallace, 533. 

8 102 United States, 586. This was a case arising under the act of 1864 laying an 
income tax, the plaintiff in error maintaining that this, as a direct tax, should have been 
apportioned among the states, under the provisions of the Constitution. 

4 The unexpected extension of the meaning of " direct taxes " by the Supreme Court 
in the "income tax" decisions of 1895 * s touched upon, p. 133, below. 

6 The act of July 9, 1798, I " Statutes at Large," p. 580, provided for valuation of 
taxable objects j and that of July 14, ibid., p. 597, provided for the apportionment and 
collection. 



THE DIRECT TAX OF 1861 99 

assistant assessors, collectors, supervisors, and inspectors. The 
quota of every state was to be assessed upon houses, lands, dwell- 
ing-houses, and slaves. Houses were to be assessed according to a 
classified valuation at rates fixed for the whole Union, and slaves 
were to be assessed fifty cents per head, if between twelve and 
fifty years of age ; and so much of the quota of any state as was 
not covered by the levy upon houses and slaves was to be assessed 
upon lands and improvements at such rates as might be required 
to make up the deficiency. 1 The tax was to be a lien upon the 
real estate and slaves of the person assessed for two years from 
the date when it became payable, and collection could be enforced 
by distraint and sale of personal effects. Wolcott had suggested, 
but had also disapproved, a plan for fixing a time at which a state 
might pay its quota into the Treasury and for prescribing collec- 
tion by the authority of the United States " in cases of delin- 
quency." 2 But no trace of any such plan is to be found in the 
acts of 1798. Beyond the bare apportionment the states are not 
recognized except as mere geographical divisions. The acts pro- 
vide solely for levy by the federal government upon its citizens, 
the individual taxpayer is the only party responsible, and no 
authority stands or can interpose between him and his government. 
The framers of the direct tax acts of 181 3 3 followed in general 
the lines laid down in 1798. Comparison of the acts will show 
revision and rearrangement, and perhaps simplification of the sys- 
tem, but no serious change of theory. The tax of three millions is 
apportioned to the counties in every state, and it is provided that 
the state legislature may by act vary the county quotas, provided 
such alterations are duly certified to the Secretary of the Treasury ; 

1 This residual assessment upon lands closely resembles the method adopted in as- 
sessing the group of taxes of which the English land tax is the survival. See 10 William 
III., c. 9 (Rolls ed.); and Act of 1763, 4 George III., c. 2, §§ 3, 4 (Ruffhead). 

2 This plan, he says, " partakes of the system of requisitions upon the states, which 
utterly failed under the late confederation, and to remedy which was one great object 
of establishing the present government." " State Papers on Finance," i. 436. 

8 The act of July 22, 181 3, 3 " Statutes at Large," p. 22, provides for the assessment 
and collection, and that of August 2, ibid., p. 53, for the apportionment. Gallatin sailed 
for Europe in May, 181 3, but it seems probable that the direct tax bills of that year were 
among the bills spoken of in his letter of June 10, 1812, as already prepared in answer 
to a request from the Committee of Ways and Means. " State Papers on Finance," ii. 
614. It is interesting to observe that, in January, 1812, Gallatin appears to have lost his 
hold on the strict definition of direct taxes under the Constitution. Ibid., p. 525. 



iLrfC 



100 ESSAYS 

but the levy according to such alterations is made by virtue of the 
act of Congress, and not under the act of the state legislature. 1 
The tax is to be levied on the value of lands, houses, and slaves, 
" at the rate each of them is worth in money,'' abandoning the 
peculiar method of a residual assessment upon land, adopted in 
1798 ; and the provisions as to enforcement by lien and distress 
remain as before. In short, the theory of the acts of 18 13 con- 
tinues to be that of a levy by the general government upon the 
individual citizen, in no way different in principle from any case of 
national internal taxation. With a wise regard to convenience, 
however, the apportioning act provided that any state " may pay 
its quota into the Treasury of the United States," and thus secure 
a deduction of fifteen per cent, by paying before February 10, 1814, 
or of ten per cent, by paying before May 1 ; " and no further pro- 
ceedings shall thereafter be had under this act in such state." 
The option thus allowed to the states did not, however, change the 
character of the tax as a tax upon individuals, or make it a tax upon 
states. Seven states assumed the payment of their quotas; 2 but 
the other eleven, in which the collection by federal officers was 
made as originally provided, were not for that reason in any sense 
delinquent as states, nor did they thereby fail in any obligation to 
be found in the acts of Congress or elsewhere. 

The act of 18 15, which provided for an annual tax of six mill- 
ions of dollars, is to a considerable extent a literal transcript from 
the two acts of 18 13, with such amendments in detail as experience 
or the proposed permanency of the tax required, but with no 
change in theory or in general procedure. And no change was 
made by the act of 1816, 3 which simply repealed the provision for 
an annual tax, and laid instead a tax of three millions for the 
current year. In 18 15, and also in 18 16, four states assumed 
the payment of their quotas ; and the collection was made by 
the United States in the other fourteen. 

When the levy of direct taxation by apportionment was resorted 
to for the fifth time, in 1861, Congress found most of the work of 

1 § 6 of the act of August 2, 1813, 3 "Statutes at Large," p. 71. For the painful 
effort of the Committee of Ways and Means to arrive at a county apportionment, see 
their report, " State Papers on Finance," ii. 628. 

2 " State Papers on Finance," ii. 860. 

8 The act of Januarys 1815, 3 "Statutes at Large," p. 164; the act of March 5, 
1816, ibid., p. 255. 



THE DIRECT TAX OF 1861 IOI 

legislation done for it in advance. The first revenue measure of 
the war provided for an annual direct tax of twenty millions, 1 to be 
laid on the value of lands with their improvements and dwelling- 
houses, "at the rate each of them is worth in money." In its 
general scheme and in its details, the act of 1861 was a revised 
transcript of the acts of 1813 and 1815. The theory enunciated 
in Hylton v. United States was unfamiliar to many members ; and 
the Committee of Ways and Means had to labor in debate with 
representatives who wished to include personal estate, or incomes, 
among the objects of taxation. The Committee itself at first 
treated slaves as taxable property, as was done in the earlier acts. 
In its careful provision for dealing directly with the individual 
citizen of the United States and for enforcing a direct lien upon 
his property, the law of 1861 follows the earlier legislation, section 
by section. It makes the same provision for an assumption of 
quotas by the respective states at their pleasure, providing that 
any state may give notice of its intention " to assume and pay, or 
to assess, collect, and pay," the direct tax, and upon payment be 
entitled to a deduction of fifteen per cent in lieu of the costs of 
assessment and collection. The date for giving this notice was the 
second Tuesday of February, 1862, and the expectation that the 
states would use this option was so strong that the act postponed 
the appointment of assessors and collectors until that day. But 
the greater completeness of the optional arrangement does not 
appear to import any change in the real bearing of the act as lay- 
ing a tax upon individual citizens. 

The recommendation of this tax to the attention of Congress 
by Secretary Chase, in his report of July 4, 1861, did not imply 
any strong reliance upon it. Mr. Chase advised the raising of 
" twenty millions, for the current year at least, by direct taxes or 
from internal duties or excises, or from both." It is probable 
that both the Secretary in giving this advice and Congress in im- 
proving upon it were influenced by the fact that the earlier legis- 
lation on direct taxation could be made available quickly, 2 and 

1 The act of August 5, 1861, 12 "Statutes at Large," p. 294. 

2 The Chairman of the Committee of Ways and Means, Mr. Thaddeus Stevens, felt 
no mortification when Mr. Roscoe Conkling stigmatized the bill as "undigested." "It 
may be so, for it was a direct copy of one drawn by a man who was less wise than our 
critics are now. It was drawn by Albert Gallatin ; and this undigested, ill-considered 
bill is an exact copy of his." Cong. Globe, 1861, p. 307. Mr. Collamer, of Vermont, 



102 ESSAYS 

that time was needed for the study of any broader system of in- 
ternal taxes. The direct tax had, in fact, far less to recommend 
it in 1 86 1 than at the beginning of the century. The inequality 
of apportionment according to population, serious enough at first, 
had been increased by the concentration of wealth in the commer- 
cial and manufacturing states. Only the smallness of the sum to 
be raised made a special assessment upon one species of property 
tolerable, in a country where personal property had multiplied so 
greatly. And, finally, the slowness of the method, amply shown 
by four trials, unfitted it for an occasion when promptness of supply 
was of the last consequence. But all of the action at the special 
session of 1861 was essentially provisional, and both for the Secre- 
tary and for Congress it was a welcome reflection that twelve or 
fifteen millions could be added to the regular revenue by a tried 
expedient and by forms already settled. 

The organization of the internal revenue system in 1862 ap- 
peared to the Senate a fit occasion for repealing the direct tax, but 
not so to the House. In the committee of conference on the 
internal revenue bill, the House members insisted that the repeal 
would release real estate from its due share of burdens, and would 
leave the whole weight of taxation to be borne by commerce and 
manufactures ; and the difference between the representatives of 
the two Houses was so great that the bill was nearly shipwrecked 
in conference. 1 But the House receded in substance, and the 
Senate in form; and thus the act of July 1, 1862, provided (in 
§ 119) that the direct tax act of 186 1 should be held to authorize the 
levy and collection of only one year's tax, and that no other should 
be levied under the said act until April 1, 1865. This suspension 
of levies under the system was made final by the great internal 
revenue act of June 30, 1864, which (in § 173) provided that no 
further direct tax should be assessed until Congress should " enact 
another law requiring such assessment or collection to be made." 
By this action, proposed by the Senate and accepted without demur 
by the House, proceedings under the direct tax of 1861 were 
finally limited to the levy and collection of a tax for that year only. 

remarked in the Senate that "the bill is essentially the same, in all its essential features, 
with the bill by which a direct tax has been laid four times in this government." Ibid., 
p. 398. 

1 See Mr. Stevens's statements to the House, June 23, Globe, 2890, 2891. 



THE DIRECT TAX OF 1861 103 

The results of the levy for 1861 can be considered more con- 
veniently if we separate the loyal states and territories from those 
in insurrection. Of the former, all except Delaware and Colorado 
territory assumed the payment of their quotas. The act of 1861, 
following the precedents of 18 13 and 18 15, allowed any state or 
territory, upon giving due notice, to assume or assess " in its own 
way or manner " its quota, with a deduction of fifteen per cent, if 
payment should be made to the Treasury before July 1, 1862, or 
of ten per cent, if made before October 1, with the provision that 
such quotas might be satisfied by the release of liquidated and 
determined claims of equal amount due to any state or territory 
by the United States. The settlement of the quotas by this pro- 
cess of offset, at a time when every loyal state had its account 
against the general government for military services, equipments, 
or advances of some sort, and the slow passage of such accounts 
through the forms of the Treasury, no doubt makes the collection 
from the direct tax, as given in the published tables, appear much 
slower than it was in point of fact. 1 Still, it can probably be said 
with truth that the government received nothing from the direct 
tax during the war which it would not have received otherwise. 
The loyal states which paid their quotas in services and equipments 
would have raised as many men and have equipped them as 
promptly if the direct tax had never been laid. Their quotas 
ultimately gave the government some facility for the adjustment 
of their accounts, but the military aid on which the quotas 
were virtually expended was not called out by taxation. In 
Delaware and Colorado the tax was collected, after some delay, 
by the internal revenue officers of the United States ; and, except 
some trifling amounts from the territories, the accounts of all the 
other loyal states and territories for the direct tax were cleared. 
The amount assessed upon all the states and territories, except 
the eleven states in insurrection and the territory of Utah, was 
$15,027,534. Deducting the allowances made to states which 

x The annual Finance Report states the receipts from direct taxes down to 1870 as 
follows : — 

1862 £i,795>332 1867 $4,200,234 

1863 1,485,104 1868 1,788,146 

1864 475,649 1869 765,686 

1865 1,200,573 1870 229,103 

1866 1,974,754 



104 ESSAYS 

advanced their quotas, the amount collected from the loyal states 
and territories appears to have been $ 12, 937,805. * 

There remain the eleven states which were in insurrection when 
the tax was laid, and the territory of Utah. More than one of the 
speakers in Congress urged as a recommendation of an apportioned 
tax that the amount allotted to any state in arms against the 
government could stand over for ultimate collection, and that com- 
munities which refused to contribute to the revenue in any other 
form might thus be made to yield finally a share of direct taxation. 
The act of 1861 accordingly provided (§52) that, if the execution 
of the law should be prevented in any state by rebellion, it should 
be the duty of the President, " so soon as the authority of the 
United States therein is reestablished, to collect the sums due 
from the persons residing or holding property or stocks therein," 
with interest for delay. Detailed provision was made and special 
machinery was established for the same purpose in 1862 by the act 
of June 7, "for the collection of direct taxes in insurrectionary 
districts within the United States and for other purposes." This 
act made full provision for the levy of the tax in case of partial 
occupation of the territory of any state by the forces of the 
United States. It authorized the levy upon lands in insurrection- 
ary states according to the last state valuation, and charged every 
parcel accordingly with its proportion of the quota of the state, 
and with a penalty of fifty per cent in addition, the tax and 
penalty becoming a lien upon the lands in all states or parts of 
states declared by the President, by due proclamation, to be in 
insurrection. 2 A board of three tax commissioners was to be 
appointed for every insurrectionary state, to enter upon their 
duties whenever the commanding general entering any such state 
" shall have established the military authority of the United States 
throughout any parish or district or county of the same." Sixty 
days were allowed for payment by the owner of any parcel of land 
after the amount of tax due upon it should have been fixed ; and 

1 This is the statement for February 18, 1888, given in Cong. Doc, 1 887-1 888, 
House Reports, No. 552, p. 44, deducting $8409 overpaid by Wisconsin. It is to be 
observed that the figures given cannot be reconciled with precision, the methods of ac- 
counting in the Treasury having been inconsistent ; eg. ibid., pp. 9, 15. 

2 The proclamation of July 1, 1862, declared in insurrection the eleven states, with 
the exception of thirty-nine counties of Virginia, comprised in the inchoate State of 
West Virginia. 



THE DIRECT TAX OF 1861 105 

thereupon all lands upon which the tax was unpaid became for- 
feited, and the commissioners were required to advertise them for 
sale to the highest bidder and to strike them off to the United 
States, unless some person should bid as much as the tax, penalty, 
costs, and interest for delay of payment. Provision was made for 
the redemption of property thus sold, if the owner or any person 
in interest should appear within sixty days and make payment, 
taking an oath to support the Constitution of the United States. 
Redemption within one year was allowed to any owner who should 
be unable to make payment by reason of the insurrection, and 
should have taken no part therein after the passage of the collec- 
tion act ; and two years for redemption were allowed to absentees, 
aliens, or persons under legal disability. 

Under the act of June 7, 1862, commissioners from time to 
time made assessments for the direct tax in about one-half of the 
counties in the eleven states, and made collections in all those 
states except Alabama. 1 Assessments were enforced by sales of 
lands for taxes in districts occupied by the federal forces until the 
order of the Secretary of the Treasury, on May 17, 1865, sus- 
pending all such proceedings. The sales were necessarily within 
narrow areas, 2 and the amount received from the sale of valuable 
properties under such circumstances was trifling. 3 After the sus- 
pension of sales, the collection still went on, but under great 
difficulties, caused by the unsettled and impoverished condition of 
the South. Moderate as were the sums called for, the distress of 
Southern taxpayers made a profound impression. The Joint 
Committee on Reconstruction, which reported the fourteenth 
amendment of the Constitution, recommended a measure whereby 
any Southern state, upon ratifying the amendment, should be 
empowered to assume the payment of such part of the direct tax 

1 " Report of the Commissioner of Internal Revenue" for 1883, in Finance Report, 
p. 165. 

. 2 The sales in Virginia were in the counties of Alexandria, Accomack, and North- 
ampton, — that is, near Washington and on the Eastern Shore ; in South Carolina, they 
were confined to the parishes of St. Helena and St. Luke, in the Sea Islands ; in Florida, 
to St. Augustine and Fernandina ; in Tennessee, to Memphis ; and in Arkansas, to 
Little Rock. 

3 For an account of the property sold in Virginia, Florida, Arkansas, and Tennessee, 
with the valuation of each parcel, the tax due thereon, proceeds of sale, and other par- 
ticulars, see the letter from the acting Secretary of the Treasury, February 26, 1883, in 
Senate Exec. Doc, No. 85, of 1 882- 1883. 



106 ESSAYS 

assessed upon its citizens as should still remain unpaid, with per- 
mission for postponing the payment in that case for ten years. 1 
The House, on the 9th of July, 1866, on motion of Mr. Boutwell, 
who remarked that " the operation of collecting what remains 
uncollected of the direct tax in the rebel states operates more 
harshly upon our friends than upon our enemies," inserted a 
section in a tariff bill of that session suspending that operation 
until January 1, 1868. The tariff bill did not reach final action ; 
but the Senate, on the 24th of July, inserted the same provision at 
the end of a bill to protect the revenue, and in this form it became 
a law. 2 The Southern states, it was explained in the Senate, were 
proposing to assume their respective quotas, with some indulgence 
to be given by Congress in the way of credit ; and it was deemed 
unwise to distress individuals by the regular process of collection, 
when the whole matter could be arranged on easier terms. At the 
next session, by the act of March 26, 1867, the Secretary of the 
Treasury was authorized to discontinue the employment of officers 
for the collection of direct taxes in the insurrectionary states, and 
to turn over the business to the local officers of internal revenue. 
A joint resolution of July 23, 1868, continued the suspension of 
proceedings until January 1, 1869; but when that day came, no 
further measures were taken by Congress or by the Executive, and 
thus the further collection of the tax was practically abandoned. 
Attention to the subject was asked for by the Commissioner of Inter- 
nal Revenue in 1868, 3 but the subject had clearly become too much 
embarrassed to be inviting. It is clear, however, that down to this 
time the government, in collecting the tax, had dealt with the 
individual taxpayer precisely as in all other cases of taxation. 
The privilege of assumption, allowed to the states by the original 
act, not having been used, had expired by its own terms ; and, as 
no renewal of the offer was made by the United States, the direct 
tax continued to be an obligation resting upon the individual when 
assessed, secured perhaps by a lien upon his land, but binding upon 
no other person or body of persons whatever. 

It was, perhaps, owing to the expectation of an arrangement 

1 See House Reports, 1 865-1866, No. 30, p. v. 

2 See Cong. Globe for 1865- 1866, 3692, 4068. The provision is § 14 of the act of 
July 28, 1866. 

8 See Finance Report for 1868, p. 482. 



THE DIRECT TAX OF 1861 107 

for the assumption of unpaid quotas by the Southern states that 
the First Comptroller of the Treasury, in a statement of accounts 
between the general government and the several insurrectionary 
States on May 20, 1868, charged them with their respective quotas 
as if some legal liability therefor rested upon them. This view of 
the case, although not uniformly followed by subsequent comp- 
trollers, 1 appears for many years to have fixed the construction of 
the law for the accounting officers in the Treasury. 2 The states 
being charged each with its unpaid balance of direct tax, moneys 
becoming due to them from the general government upon other 
accounts, as from the sale of public lands in which they were 
interested jointly with the government, were not paid over, but 
were credited to them by way of offset. The extreme point in this 
official confusion was reached when, in 1883, the First Comp- 
troller decided that the sum of $35,555, appropriated by act of 
Congress to refund to the state of Georgia money expended by 
her for the common defence in 1777, should be paid to the Treas- 
urer of the United States, " to the credit of the state of Georgia 
on account of direct taxes charged against the state." 3 As far as 
a'government can be said to remember or forget, the government 
of the United States must be said at this juncture to have forgotten 
what it meant by the direct tax of 1861. The true meaning of the 
tax was settled, however, by the highest authority, and the whole 
subject placed in its true light, when the Supreme Court of the 
United States, in the case of the United States v. Louisiana, at the 
October term, 1887, 4 decided that the direct tax law in 1861 did not 
create any liability on the part of a state to pay the tax, and that 
the apportionment merely designated the amount to be levied upon 
the property of individuals in the several states without any liabil- 

1 See the important adverse decision by A. G. Porter, First Comptroller, giving the 
legislation from 1798 and much documentary matter. Senate Exec. Doc, 1879, No. 24. 

2 See House Exec. Doc, 1 885-1 886, No. 158, p. 15. 

" It must be acknowledged that this construction of the law appears not to conform 
to the intention of the acts upon this subject ; but the decision fixing it as a state debt 
has such force in the Treasury Department as to preclude any other view of the direct 
tax than that of a debt due by the state. ... If the state owes the debt, the land- 
owner does not owe it." Ibid., p. 17. 

3 4 "Decisions of the First Comptroller," House Miscell. Doc, 1883-1884,^0. 56, 

P- 354- 

4 123 United States, 37. The opinion of the court was given by Field, J., no one 
dissenting. 



io8 



ESSAYS 



ity attaching to the state in its political and corporate character. 
This decision finally leaves the unpaid quotas of the direct tax in 
precisely the same position as any other tax assessed upon indi- 
viduals, which the United States government has been unable, or 
has neglected, to collect in full. It is difficult, for example, to 
distinguish it in any essential particular from the case of unpaid 
income taxes laid during the war and collected by severe process 
throughout the loyal states, but neither then nor at any other 
time collected in the insurrectionary states. 

This decision plainly makes it necessary, in determining the 
amount still unpaid on the quotas of the Southern states, to dis- 
regard all the accounts with tax commissioners and with states, 
and to set down simply the amount of taxes reported as uncollected. 
These are the amounts due from individuals ; and, as no individual 
owes any more than the due assessment upon his property, by 
reason of any other person's default, so no individual owes any 
less than that assessment, because of money stopped on its way to 
the state Treasury, or otherwise coming to the United States from 
any of his fellow-citizens. The amounts reported as remaining 
uncollected, 1 in the eleven insurrectionary states and in Utah, are 
given in the following table : — 



Quotas Uncollected 



Quotas Uncollected 



Alabama 


$529,313 


$529,313 


N. Carolina, 


$576,195 


$198,742 


Arkansas . 


261,886 


107,185 


S. Carolina, 


363,571 


141,174 


Florida . . 


77,523 


72,762 


Tennessee, 


669,498 


277,506 


Georgia . . 


586,367 


501,940 


Texas, . . 


■ 3SS,i<>7 


174,265 


Louisiana . 


385,887 


71,386 


Virginia, . 


729,071 


286,663 


Mississippi . 


413,085 


343.500 


Utah, . . 


26,982 
$4,972,485 $ 


26,982 
2,731,418 



The process of collection in the insurrectionary states during 
the war by assessment and sale of property in limited districts, 
under the act of June 7, 1862, caused great hardship to dispos- 



1 These sums are taken from the accounts stated by a commission, appointed by 
Secretary Manning in 1885, to investigate and adjust all the direct tax accounts. House 
Exec. Doc, 1885-1886, No. 158. See particularly pp. 24-31 and 7-12. The sums found 
by this commission to be still due differ from the amounts stated by Secretary Folger in 
1884 and from the statement made by the Commissioner of Internal Revenue in 1885, 
and the Secretary and the Commissioner also differed from each other. Ibid., pp. 14, 15, 
The report of the commission appears to have been adopted in the Register's office. See 
House Reports, 1887-188S, No. 552, p. 44. 



THE DIRECT TAX OF 1861 109 

sessed owners ; but this was buried and lost sight of in the vast 
destruction of property and the widespread ruin which marked 
the track of contending armies. In South Carolina, especially, 
this process led to complications which must be noticed briefly as 
an important element in the general confusion caused by the tax. 
The act of 1862, as has been said, authorized the tax commission- 
ers, where property was sold in the insurrectionary districts for 
the tax, to strike it off for the United States, if no other bidder 
offered more than the tax and penalty with interest. Under an 
act of February 6, 1863, the commissioners were authorized to 
bid on behalf of the United States as high as two-thirds of the 
assessed value of the property. Lands struck off to the United 
States the commissioners were empowered to lease until the 
reestablishment of civil government, or, under the direction of 
the President, to sell in limited parcels to loyal citizens or to 
persons who had served in the army or navy, only one-fourth of 
the purchase money being required in cash from army or navy 
purchasers ; and the proceeds of leases and sales were to be paid 
into the Treasury of the United States, one-half thereof to be paid 
over ultimately to the reestablished state governments for specified 
purposes. 

The special application of these provisions to the case of South 
Carolina was affected by the peculiar circumstances under which 
the forces of the United States held the abandoned Sea Islands 
with their valuable cotton lands, and by the great numbers of 
colored people collected there. The lands sold for taxes were there 
held and managed from the first with necessary reference to the 
employment and well-being of the black population. To this end, 
instructions were issued by President Lincoln, September 16, 1863, 
which, besides regulating the sale of land to persons of the army 
and navy, required certain plantations to be sold in five-acre lots, 
set apart others to be leased and the rents to be used for school 
purposes, and a further large number to be divided into twenty- 
acre lots, to be sold "to the heads of families of the African 
race." 2 Under these arrangements, some lands, bought in at the 
tax sales for the United States, remained for several years in the 
possession of the government; others were resold at a large 

1 These instructions, with a variety of other documents, are annexed to the report 
•of A. G. Porter, First Comptroller, in Senate Exec. Doc. of 1879, No. 24, p. 223. 



no ESSAYS 

advance; others still, having been sold and partly paid for, 
reverted to the government, and were resold or remained in its 
possession. The transactions became involved, litigation sprung 
up, and it became plainly impossible for the government to man- 
age its complicated interests in the Sea Islands with advantage. 
Congress, therefore, by a general act, dated June 8, 1872, with 
judicious liberality provided that any lands owned or held by the 
United States, under the collection act of June 7, 1862, and the 
subsequent proceedings, and not used for public purposes, might 
be redeemed by the original parties in interest or their representa- 
tives at any time within two years, upon payment of the tax and 
costs, with interest at the rate of temper cent, saving the rights 
of all persons who might in the meantime have made valuable 
improvements. Lands not redeemed at the end of the two years 
were to be sold by public auction, but by subsequent acts the 
period for redemption was extended to February, 1877. The 
school farms spoken of above were not covered by this act, but 
were similarly provided for by the act of March 3, 1887, which 
closed a troublesome and exceptional piece of administration. 

The result of these operations is that, the quota of South Caro- 
lina being $363,571, of which $141, 174 remains unpaid, the Treasury 
of the United States appears to have received in cash $468,864, 
besides sums amounting to $134,592 paid to the Freedmen's 
Bureau and otherwise disbursed on various accounts, of which a 
part should no doubt be added to the sums accumulated in the 
Treasury as the result of the tax sales. That the former owners 
of the lands have no claim to this fund as against the govern- 
ment goes almost without saying. At the same time, it is clear 
that, whatever else the government may do as to the direct 
tax, this is not money to be retained by a great and generous 
nation. 1 

It has been seen that the decision of the Supreme Court in the 
Louisiana case finally brought the direct tax of 1861 back to its 
proper position as a tax laid by the United States upon its individual 
citizens and imperfectly collected by reason of the Civil War. The 
default in its collection being a default of less than one-seventh of 
the total amount called for, it is probable that this tax has been 
more completely collected than most of those laid during the war. 

1 See the remarks of Mr. Sherman, p. 1 14, below, note. 



THE DIRECT TAX OF 1861 III 

For example, it has probably been collected more thoroughly than 
the income tax, the foundation of which was laid by the same act 
which established the direct tax ; and it is not likely that anything 
but an overflowing treasury would have enabled Congress to see 
in the one case more than in the other an occasion for remedial 
legislation. Under any other conditions it is likely that the un- 
collected $2,730,000 of direct tax would by common consent have 
been treated as an insignificant detail in a great mass of incurable 
irregularities left behind by four years of civil war. The question 
as to the possibility and expediency of clearing up this special 
case of fiscal confusion having been raised, however, it must be 
admitted that the solution of it is not simple, and that the division 
of opinion created is not unnatural. 

Three modes of dealing with the subject have been suggested. 
First is that proposed by the Commissioner of Internal Revenue 
in 1883, 1 "that measures be taken, as soon as possible, to collect 
the balance of the tax," on the ground that " exacting a direct tax 
from one landowner and permitting the tax upon the land adjoin- 
ing to remain unpaid is not equitable." The reason is undeniable ; 
but, after all, could equity be secured now by resuming the col- 
lection of a tax, all proceedings under which have been suspended 
for twenty years ? The condition of landed property has altered, 
in one place for the better and in another for the worse, through- 
out the states concerned ; the rights in such property have 
changed hands, and all the relations once existing between the 
individual members of any body of taxpayers and forming the 
basis of possible equity in 1861 have vanished. A large part of 
the individuals themselves have disappeared. To levy upon the 
lands on which the tax is unpaid would be, in a great proportion 
of cases, to collect a tax from subsequent purchasers under a claim 
which they were justified in believing that the government had 
abandoned long ago. It has been declared with great positive- 
ness that the government has lost its hold upon the land, but this 
point need not be considered. If the government still retains the 
right of assessment on the lands of delinquents, the exercise of 
that right upon the lands as now owned and used would be 
universally recognized as too difficult and too certainly unjust, as 
between members of the same community, to be an admissible 

1 Finance Report, 1883, p. 167. 



112 ESSAYS 

expedient. The cure of the difficulty by the first method appears, 
then, to be out of the question. 

The second mode of dealing with the case, the opposite of that 
just considered, is to return such taxes as have been paid under 
the legislation of 1861, and to remit all that are unpaid. In other 
words, equity being unattainable by completing the levy, secure it 
by undoing what has been done. It is not within the proposed 
scope of this paper to discuss the constitutional question as to the 
right of Congress to lay taxes, let us say in 1890, in order to re- 
fund taxes which were properly levied and collected according to 
law in 1 862- 1 866. We are here concerned solely with the proposi- 
tion to remedy the inequality resulting from the failure to collect 
from all of the taxpayers in 1862 and the years following. Un- 
deniably, if there were no question except one of bookkeeping 
between the states of the Union, as the Treasury has sometimes 
seemed to suppose, the process of crediting every state with an 
amount equal to its quota would finally close the accounts and 
produce equality in that sense. But the only question really open, 
under the circumstances, is that of producing equality among the 
taxpayers; and this object it appears to be impossible to secure 
by any process of refunding. If, of two men, one paid his tax 
twenty-five years ago and the other has never paid it, it is im- 
possible to restore equality by simply returning to the former that 
which has been detained from him for a quarter of a century. 
And if a third, when assessed, suffered the collection of the tax 
by a forced sale of his land for a fraction of its value, he is not 
placed on the same footing with either of the others, by returning 
to him or his heirs the amount of the tax or even the proceeds of 
the tax sale. In short, when the tax-collector has done a part of 
his work by compulsory process and time has elapsed, an equitable 
adjustment between individuals becomes impossible. Refunding 
the tax may satisfy the mere formal accountant, but it does not 
undo the past or its consequences ; and, so far as the object sought 
is the equalizing of burdens, such a measure is nearly nugatory. 

It is, at any rate, so nearly nugatory that there may be a grave 
question whether, in the attempt to cure one set of inequalities by 
a distribution of money, a greater set does not spring out of the 
process of raising the money. It was contended in debate in 
Congress that the taxes collected in 1890, after the growth of the 



THE DIRECT TAX OF 1861 113 

states has changed their relative places in population and wealth, 
would not rest upon them in the proportion in which the contribu- 
tions of 1 862- 1 866 must be returned. Kansas, it was said by one 
gentleman, will pay toward the refunding operation not less than 
#340,000, but will receive less than $72,000; New Hampshire, 
it was said in the Senate, will receive but $185,000, and will con- 
tribute at least $300,000. The incidence of our taxation is too 
uncertain to make these calculations important; and, in most 
cases of expenditure for public objects, such considerations as to 
the exact balance of benefits and burdens are properly disregarded. 
But the present is a case in which the attempt to restore such a 
balance with respect to a particular transaction is the main propo- 
sition ; and it therefore becomes not only justifiable, but necessary, 
to inquire whether the proposed equality would be real or only 
apparent. The answer to this question is found in the census 
tables, where the redistribution of taxpaying power in the last 
quarter of a century is too manifest to require recital. 

The third method of dealing with the subject would be, if we can 
neither complete the collection nor return the tax without produc- 
ing fresh mischief, to leave the matter where it is. No doubt 
this course, as well as the others, is open to objection. It is a 
peculiarity of the case that the United States can neither act nor 
refrain from acting in it without running counter to some instinct 
of justice. But there would be less disturbance of existing inter- 
ests, and time would heal all difficulties more quickly, it is probable, 
if it were frankly recognized that, in such matters, the errors or 
misfortunes of the past are finally beyond all remedy. The funds 
which have been collected from the proceeds of lands leased or 
resold, or from the surplus of tax sales, might be returned to the 
parties representing the original ownership, and the account of 
the direct tax could then be wound up, as that of the other taxes 
of the war has been, without further inquiry as to the degree in 
which different bodies of citizens contributed to them. 

It is the second of these methods, however, which has secured 
the approval of Congress. The bill which was passed last winter, 
vetoed by the President and passed over the veto by the Senate 
in the closing hours of the session, was the fruit of an agitation 
which has been in progress in different forms for ten years, and 
has developed a strong appetite among the state governments for 



114 ESSAYS 

the refunding of their quotas. The bill required the Secretary of 
the Treasury to credit every state and territory and the District 
of Columbia with a sum equal to all collections made from it or 
its citizens, by set-off or otherwise, and to remit all sums remain- 
ing unpaid ; and appropriated the money necessary to pay all sums 
thus becoming due from the Treasury ; it being provided, how- 
ever, that sums which have been collected in any state from citi- 
zens, directly or by sale of property, should be held in trust by 
the state government for the benefit of the persons from whom 
collection was made, or their representatives. It was also pro- 
vided that the owners of lands sold in the parishes of Saint 
Helena and Saint Luke's in South Carolina should be paid the 
value of their lands, — to the owners of lots in the town of Beau- 
fort one-half of the value assessed by the direct tax commissioners, 
to the owners of cultivated lands five dollars per acre, and to the 
owners of other lands one dollar per acre, with the proper excep- 
tions as to lands heretofore redeemed. The purchase money 
received on account of uncompleted sales to persons in the army 
and navy was to be returned to the persons paying it. For all 
these purposes $500,000 was to be appropriated, including in this 
sum moneys in the Treasury derived in any way from the en- 
forcement of the tax. 1 And, finally, moneys received from the 
sale of lands bid in for the United States at tax sales in any 
state, in excess of the taxes assessed, were to be paid to the own- 
ers of the land bid in and resold, or to their representatives. 

This bill was not reached by the House of Representatives 
after the veto, and therefore failed to become a law. There can 
be little doubt that it will be passed by the present Congress. 2 It 
is sufficiently clear from its terms that the combination of local 
interests in its support is powerful, and it has every political 

1 As passed by the House, the bill proposed to pay the dispossessed owners accord- 
ing to the valuation of i860, and appropriated $850,000 for the purpose. The rate and 
amount were cut down in conference to meet the views of the Senate. On the adop- 
tion of the report of the conference committee, Mr. Sherman made this explanation : 
" Upon the first sale for direct taxes, the land was bid in, I think, at some $ 13,000, which 
we credited to the state of South Carolina ; and it was subsequently resold by the 
United States for $455,000. So, after all, the money we are to pay back to the owners 
of this land in South Carolina is only about the sum that we received on the resale of the 
land." Cong. Record, 1888-1889, p. 2139. 

2 [This expectation was exactly realized by the act of March 2, 1 891. — Editor's 
Note.] 



THE DIRECT TAX OF 1861 115 

chance in its favor. The passage of the measure, whenever it 
comes, will close a singular chapter in the history of taxation, — 
a chapter the repetition of which, we may be sure, our people will 
not be easily tempted to risk hereafter. The direct tax provided 
for by the Constitution has at last been effectually discredited as 
a source of revenue, and it has also been too prolific of misconcep- 
tion and confusion to have any interest henceforth as a practical 
measure of finance. 



THE NEW INCOME TAX 1 

By the tariff act of 1894 the United States government, for the 
second time in its existence, undertakes the levy of an income tax. 
The future student of our history will probably have a moment 
of mental embarrassment when he finds the provision for laying 
this novel burden upon the taxpayer in " an act to reduce taxation, 
to furnish revenue for the government, and for other purposes. 
His difficulty in comprehending the real significance of the measure 
will not be lessened when he attempts to trace the legislative his- 
tory of the act. He will not find the explanation in any exigency 
of the Treasury, where the first-fruits of the tax cannot be received 
before July, 1895. He will not find it in the avowed policy or the 
unavowed political needs of either of the great parties, both of 
which found themselves deeply divided by the proposition for the 
tax He will be likely to ascribe the easy acquiescence of a con- 
siderable section on each side in Congress to the presence of an 
ill-defined notion that the people are about to demand some drastic 
action for depleting the well-to-do classes, and to the habitual dread 
with which most politicians for a time listen to the demands of 
any new political movement, like that of the Populists. At any 
rate, it will be clear that the considerations which weighed with 
Congress in taking this important step were not fiscal, and that 
the provisions of the new act were not studied and perfected by 
its f ramers from this point of view. The very fact that the limit 
of exemption is set so high as $4000 will be a standing demon- 
stration that the measure was shaped to meet some supposed social 
or reformatory end, possibly with some sectional bearing, but, at 
any rate, not as the best result of either modern theory or modern 

practice. 

It is a great misfortune that the question of a fresh resort to 
the income tax should have come up under such untoward circum- 

1 Quarterly Journal of Economics, October, 1894. 
116 



THE NEW INCOME TAX 117 

stances, and that it should have received such a solution as this. 
The question is of too great importance to be disposed of with so 
little real study as it received from Congress, and the income tax 
is too important a resource to be discredited in the public mind by 
the working of an imperfect and crude system. The subject was 
one for the best and most careful thought of the legislator, in the 
light of the important body of practice to be found in other coun- 
tries as well as our own. So far from the careful examination 
which it required, the matter has had only a snap judgment, and the 
probability of any thorough treatment of it by our government is 
indefinitely removed. In the minds of a large part of our people 
the income tax will be more thoroughly identified than ever with the 
system in vogue during the Civil War ; and five years hence they 
will seem to have had a fresh trial and bitter experience of the income 
tax, when, after all, it is only an income tax — and that a badly 
devised one — which they have seen applied for the second time. 

The language used above, no doubt, implies a certain accept- 
ance of the general theory of taxing income. There is good 
reason for the agreement between the theoretical views of so 
many economists on this subject and the instinctive popular 
belief, which is so often met. It is, after all, the aggregate 
income of society which supplies the fund, and determines an 
upper limit, for public expenditure ; and it is the income of 
each individual member of the society which supplies the fund, and 
determines the limits, for his contribution to that expenditure. 
Every tax, says Adam Smith, must be paid from one or other 
of the sorts of revenue which make up the private revenues of 
individuals ; and his maxim which follows, to the effect that the 
subjects of a state ought to contribute to its support as nearly 
as possible in proportion to the revenue which they respectively 
enjoy, although sometimes treated as a sounding truism, is, at any 
rate, unavoidable. So far the economist and the simple poll-tax 
payer may very well agree. The former makes his reservation as 
to the difficulties, or even impossibility, of just administration, as 
Mill did when he " feared that the fairness which belongs to the 
principle of an income tax cannot be made to attach to it in prac- 
tice, and that this tax, while apparently the most just of all modes 
of raising a revenue, is, in effect, more unjust than many others 
which are prima facie more objectionable." To the payer of the 



Il8 ESSAYS 

poll-tax, however, it appears that the power of government is equal 
to every task, and that strict laws and severe penalties will readily 
accomplish the work of complete and just assessment. Without 
accepting this Utopian view of the omnipotence of human law, 
which is certainly no more true in the case of taxation than in any 
other of the operations of government, we may at least urge that 
it is sometimes worth while to inquire how close an approximation 
to administrative perfection can be made. It is the judgment of 
some important and enlightened countries, as, for example, of Eng- 
land and Prussia, that, without attaining absolute success, they make 
an approximation near enough to justice to make it worth their 
while, under every change of administration, to maintain a tax 
upon incomes as a branch of their regular revenue. The question 
whether the United States cannot do the same thing appears to be 
of some interest. If this government can make such an approxi- 
mation, the direct resort to the actual source of all taxation has 
much to recommend it in this country. 

The most striking defect in the financial system of the United 
States is the want of some easy adjustment of the receipts of the 
government. As a result of those circumstances which have made 
the customs duties our chief reliance, the Treasury may sometimes 
have a plethora when a prosperous business swells our imports, 
and sometimes a dearth when the course of trade changes ; but in 
neither case have we any important elastic branch of taxation, 
which can be relied upon to lower a surplus or fill up a deficit at 
short notice. Neither customs nor excise duties can be used for 
this purpose without serious disturbance and friction. England, as 
is well known, meets the analogous difficulty — caused by fluctu- 
ations, not in her receipts, but in her expenditures — by the 
adjustment of the income tax. Continental writers and statesmen 
have long pointed with envy to this unfailing resource of the 
Chancellor of the Exchequer. With a tax for which the adminis- 
trative machinery is permanent, but the rate is fixed for only one 
year at a time, it is easy and usual, even after the fiscal year has 
begun, to meet unexpected changes in affairs by a change in this 
variable element of revenue, — a change which takes instant effect. 
This use of the income tax, together with the power given to the 
government to borrow on short time in anticipation of receipts, is, 
in large part, the explanation of the singularly close calculation 



THE NEW INCOME TAX II9 

and the small balances of cash with which the English Exchequer 
is habitually managed. The circumstances of the United States, 
and the unavoidable difference in our leading sources of taxation, 
make it unlikely that this generation or the next will see any simi- 
lar administrative success here ; but a much closer adjustment of 
revenue to actual needs than we have at present could be attained 
by the use of a well-arranged and quickly movable tax on incomes, 
as a part of our ordinary revenue. Thus a proper income tax 
appears to have uses which make it desirable to have its practica- 
bility more carefully studied. 

When we pass from the case of ordinary revenue, and consider 
the sources of supply for emergencies, a well-constituted income 
tax has a still greater importance. Even writers who would rule it 
out from the everyday practice of a government, by reason of the 
manifest difficulty of justly administering it, will accept it as a proper 
provision for sudden and severe stress. In the presence of a great 
public exigency the inequalities of any tax cease to weigh with their 
full weight in comparison with a quick and copious yield of rev- 
enue. This was the case in the Civil War, when it was not so 
much the ignorance and inexperience of Congress as the impera- 
tive necessity of obtaining money by the quickest process, that was 
the real cause of many harsh and unjust provisions in our financial 
legislation ; and the same thing will happen again whenever some 
heavy strain is felt by the federal Treasury. Unless our system is 
improved by the addition of some important tax which is capable 
of sudden expansion, without the inconvenience which attends any 
change in a tax on commodities, we shall again see the govern- 
ment driven, may indeed see it driven in any year, to lay some 
bad tax or to borrow, in order to bridge over the gap caused by 
the slow increase of ordinary taxation. As a provision for such 
cases of extremity, the tax on incomes, if shaped for the purpose, 
has no superior and no rival ; but it can best be shaped in a time 
of quiet. Maintained at a low rate in ordinary times, and its 
methods and machinery thus perfected and made familiar, it might 
put in the hands of Congress a resource in case of need, such as 
has been sorely missed in many turns of our affairs. 

How the income tax of 1894 fails to meet the necessities either 
of ordinary or of extraordinary occasions may best be shown after 



120 ESSAYS 

a brief recapitulation of its leading provisions. 1 For five years, 
beginning with 1895, a tax of two per cent becomes due on the first, 
day of July in each year on gains, profits, and incomes, in excess 
of #4000, 2 enjoyed in the preceding calendar year by any citizen 
of the United States or any person resident therein, whether de- 
rived from property, rents, interest, dividends, or salaries, or from 
any profession, trade, or employment. The taxable income is to 
be subject to the usual deductions for taxes paid and losses incurred, 
but is to include all personal property acquired by gift or inherit- 
ance. As a basis for the assessment, every person of lawful age, 
having a taxable income of more than $3500 in his own right or 
in any fiduciary capacity, is to make "a list or return" "of the 
amount of his income, gains, and profits," under oath, with heavy 
penalties in case of refusal, neglect, or false return. All corpora- 
tions or associations doing business for profit in the United States, 
not including partnerships, are required to pay a tax of two per cent 
annually on their net profits for the preceding year; and, upon 
such payment being made, dividends upon their stocks are not to 
be included in computing the income of their stockholders. On 
all salaries and payments for services due from the United States, 
and in excess of $4000, the tax of two per cent is to be withheld by 
the disbursing officer. 

The first point which invites attention in the general scheme 
of the new law is the singular provision for including in the an- 
nual gains, profits, and income to be taxed the value of personal 
property received by gift or inheritance. The difficulty of making 
a sound distinction between income and growth of capital has al- 
ways been recognized. Financial writers have dwelt on the impor- 
tance of maintaining a line somewhere, and of so limiting taxation 
as not to impede additions to the capital which is to be the source 
of future income. The income tax of 1864 dealt with the subject 
with a rough hand, and probably treated as taxable income much 
that should have been spared ; but not even the war tax went to 

1 The sections of the Tariff Act of 1894 providing for the income tax are §§ 27-36. 

2 The English law, as modified by the legislation of 1894, exempts .£160 from all 
incomes under ,£400, and ;£ioo from all between .£400 and ^"500. The Prussian law 
now exempts all income under 900 marks, and, starting from that point with a tax of 
6 marks, advances by degrees until for incomes of 100,000 marks and upward the tax 
is approximately four per cent. 



THE NEW INCOME TAX 121 

the extent of classifying inherited property as income. It is obvi- 
ous that, in this capital point of the definition of income, the pres- 
ent tax gives up the idea of preserving any tenable line. The 
treatment of this precise point by the Prussian income-tax law of 
1 89 1 is instructive. After defining taxable income as the annual 
receipts from invested capital, from real estate, from trade and 
industry, and from other sources of periodical gain, it goes on, 
apparently from abundant caution, to draw a line between the 
income and that which yields the income : * — 

Sect. 8. Extraordinary receipts from inheritances, gifts, life insurance, from 
the sale of real property not undertaken as a business or for speculative purposes, 
and similar gains, are not to be held as taxable income but as an increase of the 
main capital \_Stammverm'dgen~\ , and, like diminutions of the main capital, come into 
consideration only so far as the yield of this is thereby increased or diminished. 

The English income tax, from its peculiar structure, also avoids 
the confusion which exists in our law. It will be recollected that 
the English law does not undertake to tax the aggregate or total 
income of the taxpayer, but only taxes certain specified descrip- 
tions of income, — rents, farmers' profits, annuities, interest, and 
dividends, gains from professions and trades, and salaries of public 
officers, — and that the taxation of legacies and distributive shares 
is left, as it should be, to stand as a part of the general system of 
death duties, and to be dealt with according to the policy govern- 
ing the whole subject, and is not made an incident in the applica- 
tion of an entirely different branch of taxation. It may be urged 
that the United States government no longer levies duties upon 
inheritances and successions, and that both Prussia and England 
do levy such duties, and that this provision in the new income tax 
may thus fill a hiatus in our legislation, the presence of which is 
now sometimes noted with regret. But it is to be remembered 
that not a few of the states now levy such duties, that more of 
them are likely to do so, and that in a comprehensive view of the 
whole field of taxation, therefore, the transmission of property at 
death did not require this attention from the federal legislator. 
If it did require such attention, it may be added, then plainly the 
succession to real property should have been taxed, as well as per- 
sonal inheritances. 

1 Das preussische Einkommensteuergesetz vom 24 Juni, 1891 (Krause's 8vo ed.), 
p. 47- 



122 ESSAYS 

The purpose of the provision for taxing personal inheritances, 
however, is probably not so much to fill a gap in our legislation as 
to strike a blow at large accumulations. The blow is not a heavy 
one, although the income tax of two per cent is double the rate 
which was levied during the war upon the transmission in the 
direct line of property, real or personal. Except as a first step, 
to be followed in the future by some more serious legislation, this 
tax will probably have no appreciable effect upon the great for- 
tunes. On the successors to small properties the moral effect, 
however, may be considerable. The man of relatively small 
means, who finds his " income " carried above the limit of $4000 
by his inheritance of a small property, and a tax exacted from him 
for the excess, is certain to feel his grievance keenly; and the 
number of such men on the list of possible taxpayers is vastly 
greater than the number of inheritors of large properties. To 
such men, and to the public generally, the word "income" has a 
certain definite meaning, not to be confused with capital by any 
eccentricity of a statute ; and the violence done to this understand- 
ing, when a so-called "income tax" takes away a share of the 
source of income, is tolerably sure to leave behind a sense of 
personal wrong, like that which can still be remembered as among 
the fruits of the income tax of the Civil War. 

Leaving this special case of inheritances, it may be remarked, 
in passing, that it may be doubted whether the same danger of 
doing violence to an instinctive sense of the difference between 
income and capital is not met in any attempt to make an income 
tax widely inclusive by sweeping phrases. "Gains, profits, or 
income . . . derived from any kind of property, rents, interest, 
dividends, or salaries, or from any profession, trade, employment, 
or vocation, ... or from any other sources whatever" — is it 
possible, under such a description of the object of taxation as this, 
to keep to any such line as that which the Prussian law, cited 
above, so clearly points out? In this case the legislator of 1894, 
like his predecessor of 1864, in his overweening anxiety lest some 
taxable persons should escape, runs to the opposite extreme of 
throwing his net over a greater number whom the law should 
properly let alone. But this excess of zeal is not peculiar to 
income-tax laws or to our national legislation. 



THE NEW INCOME TAX 1 23 

Coming now to the method by which the amount of taxable 
income, however described, is to be ascertained and brought to the 
knowledge of the assessing officer, we find that the act of 1894 
follows the line laid down by the acts passed during the Civil War, 
by making the personal declaration of the taxpayer the basis on 
which the collector is to proceed, with the aid of the best informa- 
tion he can obtain. Nothing could be simpler, on paper, than this 
method. The taxpayer is himself the one person who knows best 
the amount of his income for the tax year, and knows best the 
elements from which it may be computed if its amount is doubtful. 
The law imposes upon him the duty of making the necessary dis- 
closure for confidential use by the public officer ; and under a free 
government it is presumed that the great mass of citizens can be 
trusted to perform what is, after all, in a sense a self-imposed duty. 
But what has been the experience of the several states in assessing 
by the same method the general property taxes, which have been 
so familiar a part of our local taxation throughout this century, and 
in some states for a still longer period ? We have had painful 
evidence of the truth of Leroy-Beaulieu's extremely cautious obser- 
vation that " nulle societe humaine n'est composee en totalite 
d'hommes d'une inflexible probite." In an earlier generation and 
in a simpler community, where every man's affairs were tolerably 
well known to his neighbors, and probably differed little in kind 
from those of his neighbors, and when the opportunities for invest- 
ment were comparatively few, and chiefly of such kinds as to be 
well open to observation, the process of self-assessment by declara- 
tion in some form to assessing officers may have answered its pur- 
pose ; although, even in this case, the chief safeguard was probably 
the notoriety of essential facts rather than the individual sense of 
duty among our predecessors, strong as that may have been. But 
with the growth of wealth and the change in social conditions there 
has been substituted for this primitive state of things, over a large 
part of our country, an organization of astonishing complexity, in 
which the affairs of the individual are known to others little beyond 
the point which he may choose; and his opportunities for the 
unobserved investment of capital may almost be said to be infinite. 
State legislation has often attempted to support the flagging con- 
science of taxpayers by increased stringency, until in some cases 
the laws prescribing the form of declaration, and seeking to probe 



124 ESSAYS 

to its depths the knowledge of the declarant, are miracles of 
ingenuity. And yet there is probably no state in which the 
attempt to tax personal property, upon a list made out by the 
taxpayer under the requirements of the law, any longer succeeds. 
In the emphatic words of a board of commissioners in a state 
which has been said to bear the palm for the minuteness and 
scope of its inquisition, so far as the statute is concerned, " fully 
one-half of the property of a modern state exists in intangible 
forms : of this all but a mere bagatelle escapes taxation entirely, 
when the attempt is made to reach it in the form of property." 1 
The inability of the law to reach that which is known to the tax- 
payer alone is everywhere notorious, and shows itself in such 
absurd results as the apparent decline of personal property in 
highly prosperous communities. After long and obstinate efforts 
to enforce it, the taxation of intangible property has failed even in 
states like Massachusetts, where the machinery for its enforce- 
ment has been as carefully perfected as anywhere, and has found 
constant support in the robust faith of legislators and administra- 
tive officers. 

The difficulties in the way of assessing an income tax upon 
declarations made by the taxpayers appear to the writer to be 
completely analogous to those which defeat the taxation of per- 
sonal property. The sources of a large part of the current income 
of individuals are the very classes of intangible property which 
constantly elude assessment. The dependence for the disclosure 
of income in general is on the same average degree of honest 
compliance with law, which has hitherto proved insufficient for 
the success of state taxation in pari materia. What reason is 
there for expecting any better result under the act of 1894 than 
has been secured under a multitude of state laws ? 

It is probable that reliance is placed on the power of the 
United States government to enforce its will where a single state 
fails ; and, in dealing with some classes of evils, the superiority of 
the central power and its freedom from the influences which some- 
times hamper local authority is undeniable. It is sometimes of 
unspeakable importance that a power not affected by the passion 
or ruling interests of a narrow community should come in, with its 
irresistible strength, to enforce the laws made for the benefit of 

1 Report of the Tax Commission of Okio, 1 893, p. 42. 



THE NEW INCOME TAX 125 

the whole, and to protect the general interests of the nation. But 
the present case is not analogous to the suppression of a riot 
which has become too strong for a state government to deal with, 
or to a case of threatened interruption of the mails or of interstate 
commerce. This is a case of widely prevailing inability to meet a 
certain strain upon the conscience, and is not to be met by march- 
ing in troops, and is not at all affected by the circumstance that 
certain public officers receive their orders from Washington, and not 
from a state capital. The federal power, after all, can act in this 
matter only by making its rules stringent and its penalties severe. 
It must proceed, that is to say, in the same direction in which the 
state governments have been moving; and, if it is expected to 
advance farther than they, this can be only because it is supposed 
that its measures will be more severe or more strictly enforced. 
But what power, federal or other, can by sheer severity carry 
through successfully a system which demands from the individual 
conscience more than is required by the general moral sense of the 
community ? Increased severity in such a case must inevitably be 
met by increased ingenuity, and this all the more certainly if the 
severity is practised under an authority which is felt to be in 
any degree external and remote. Not much can be argued in the 
present case from the measure of success attained in the enforce- 
ment of the income tax of the Civil War and for a few years after. 
The United States government was then supported by a vast 
current of popular feeling, which for a time was ready to treat 
any attempt to evade public dues in the hour of calamity as a 
species of treason ; and yet it would still be easy to collect the 
evidence of the increasing difficulty which was experienced in 
finding the incomes to be taxed, after the danger had passed and 
the enthusiasm of the time had begun to cool. With no great 
tide of sentiment now existing in support of unusual federal taxa- 
tion, 1 there appears to be no ground for believing that the act of 
1894 will be able to secure the full disclosure at which it aims. 
Doubtless large sums will be collected under it, for the field to 
be reaped is wide and rich. But it is altogether improbable that 
the assessment will approach completeness or uniformity, or that 
the administration of the tax by the United States will escape the 

1 See Dr. J. A. Hill's estimates, Quarterly Journal of Economics, July, 1894, 
pp. 445-448. 



126 ESSAYS 

progressive demoralization which takes place when conscientious 
taxpayers find that others are shirking the burden which was 
intended for all. 

No doubt the acknowledgment that the taxpayer's declaration 
is an unsafe basis for the assessment, even when corrected by the 
best information at the command of the assessor, would make the 
framing of an income tax for this country far more difficult. It 
would be necessary, in all probability, to abandon the fiction on 
which our law proceeds, — that every person having taxable income 
pays to the government a fixed proportion of it, to be mathemati- 
cally ascertained by a uniform rule. In place of this theoretical 
perfection of system, we should have to substitute provisions for 
collecting the tax in all possible cases from the source of the in- 
come instead of its recipient, and this with a frank recognition of 
the fact that such a method could only give us an approximation 
to equality. It would, however, give us in all probability as close 
an approximation as the present condition of our part of the world 
will allow, which is, in fact, all that can be secured in practice 
under any system, however rigid and precise we may make the 
letter of the law. 

The obvious advantage to be gained by taxing income at its 
source, beyond the mere convenience of collecting the tax in rela- 
tively large amounts, is that the assessment is made in the quarter 
where there is the least temptation to concealment. The com- 
panies or persons paying the rent, interest, or dividends which are 
to be taxed, independently of their openness to inspection, are not 
actuated by the same motives as the individual who is called upon 
to return the amount of his income. It is with a wise perception 
of the motives at work that the English income-tax law provides 
for the taxation, not of total income, but of five distinct classes of 
income, described under the schedules A, B, C, D, and E. The 
schedules are broad, and cover the ground fairly well, no doubt ; 
but, if they do not, the law does not concern itself with a failure on 
a small scale. The great object is to narrow the field within which 
individual declarations must be relied on ; and this is accomplished 
by providing that under schedule A (rent), C (public funds), and 
E (public offices), the tax shall be collected at the source of the 
income, and not from the person who enjoys it ; that, under sched- 
ule B (farmers' profits), the tax shall be assessed on an estimated 



THE NEW INCOME TAX \2J 

profit equal to one-half of the rent paid ; and that a declaration 
shall be required only under schedule D for income from trades 
and professions. In short, the source of the income is aimed at by 
the English law, wherever the nature of the case permits ; and the 
resort to declarations, recognized as hazardous, is restricted to less 
than one-half of the total actual assessment. This system is 
entirely at variance with the current notion of an income tax ; for 
under it the income, as a whole, is not brought into view, and the 
tax is laid, not on the income as such, but on several probable chief 
constituents of the income. But, after all, the practical question 
must be whether the tax is more thoroughly collected under one 
system or the other. On this point the remarkable regularity of 
receipts from the English tax 1 and the close correspondence 
between estimated and actual receipts is strong evidence of suc- 
cessful administration, and raises a presumption in favor of the 
adoption of a similar method even under the different conditions 
presented in this country. 

It is true that, by the Prussian law of 1891, the declaration is 
now made the basis of assessment of the income tax in that country. 
The people of Prussia have had a long course of education under 
the various forms assumed by the class and income tax since 1820. 2 
At long intervals the law has been strengthened until, from a rough 
classification of the taxpayers by merely external signs, it has ad- 
vanced to its present demand that the taxpayer shall show that 
his income falls between certain rather close limits. But the Prus- 
sian declaration, made under affirmation, and "to the best of his 
knowledge and belief," is a simple document compared with that 

1 For the last ten years the receipts from income tax, as estimated by the Chancellor 
of the Exchequer at the beginning of each fiscal year and as reported at the close, have 
been as follows, stated in millions and hundredths of millions : — 





Estimated 


Actual 




Estimated 


Actual 


I 884-1885 . 


. II.25 


12. 


I 889- I 89O . 


. 12.55 


12.77 


1 885-1 886 . 


. 15.40 


I5.I6 


189O-189I 


. 13.20 


I3-25 


1886-1887 . 


• 15-75 


I5.9O 


189I-1892 . 


• 13.75 


I3.8I 


1 887-1 888 . 


• 14.34 


I4.44 


I 892- I 893 . 


. 13.40 


13-47 


1 888- 1 889 . 

T?..-_ :_ ±1 


. 12.25 


I2.7O 


I 893-I 894 . 


- I5.I5 


15.20 



Even in the exceptional year 1 884-1885 the actual receipts varied less than 7 per 
cent from the estimates. 

2 See Quarterly Journal of Economics, January, 1892, p. 207, for an article on this 
subject by Dr. J. A. Hill. 



128 ESSAYS 

which formerly confronted the American taxpayer, or that which 
is contemplated by the recent act ; and it is likely to have a much 
less important place in the business of assessment. It calls only 
for general statements of the distribution of the taxpayer's income 
under the four heads referred to on page 121, and leaves to the 
chairman of every board of assessment a wide discretion as to the 
extent to which he shall carry further inquiry. 1 The Prussian dec- 
laration, in short, appears to be a rather cautious tentative advance 
from a system of extreme laxity, — an experiment of which the 
success has not yet been tested by sufficient practice to make it 
significant for the United States. 

It may appear at first sight that the act of 1894 makes some 
concession to the method of taxation at the source, by the pro- 
vision that all corporations doing business for a profit, including 
banks, insurance, railway, and telegraph companies, shall pay a 
tax of two per cent on their annual net profits ; and that dividends 
thus taxed at the source shall not be included in the taxable in- 
come of the stockholder. Whether this provision was adopted for 
any other reason than the increased facility of collection, especially 
from non-residents, and the occasion which it supplies for requir- 
ing from all corporations a statement of accounts, may well be 
doubted. At all events, the provision acts, for the most part, not 
as a substitute for the declaration, but as an auxiliary ; for the tax- 
payer, except in cases where his income from other sources than 
dividends is not more than $3500, must still make his declaration 
in due form. It is clear, then, that the act does not tax this species 
of income at its source as the means of exempting any consider- 
able number of persons from the duty of making the usual decla- 
ration. Apparently, in the mind of the legislator, the collection 
of a tax at its source and the declaration by the taxpayer are 
things altogether dissociated. 

In some other particulars, also, the treatment of the question 
of payment by corporations in the new act is hard of explanation. 
It would seem, for example, that there would be the same reasons 

1 The administrative instructions, published by the Minister of Finance, require, in 
article 55, that the chairman shall see that the assessment is not negligently made upon 
incorrect declaration, and then add the caution, — " Andrerseits sind kleinliche Erorter- 
ungen iiber geringfiigige Punkte und jede nicht zur Erreichung des Zweckes gebotene 
Belastigung der Steuerpfiichtigen zu vermeiden." See Das preussische Einkommen- 
steuergesetz, p. 204 of Krause's 8vo edition. 



THE NEW INCOME TAX 129 

of convenience and security for collecting from corporations the 
tax on their payments of interest, as for collecting from them the 
tax on dividends. The former income-tax law, which cared little 
about the question of method, but cared much for speedy, certain, 
and large collections, provided that the income tax upon interest 
or coupons should be detained by all corporations, as well as the 
tax on dividends or other profits, and should be paid over in like 
manner to the United States. 1 This was a most judicious and use- 
ful provision, and would seem to be strongly suggestive under 
present circumstances. It is obvious that an enormous mass of 
incomes from investments would now be covered by a similar pro- 
vision, and also that the income from coupon bonds, as to the 
ownership of which no record exists, is the most slippery income 
of all, and the most easily concealed by the reluctant taxpayer. 
Still, the income from bonds and other interest on debts — so 
easily taxed at its source — is left by the new act to stand upon 
the taxpayer's declaration alone. Another point somewhat diffi- 
cult of explanation is the fact that, while the act of 1894 professes 
to establish an exemption of $4000, nevertheless persons whose 
incomes are within that line are to be subject to an income tax on 
so much income as they may derive from dividends. The corpo- 
ration paying the tax levied on its net income evidently pays, and 
is intended by the act to pay, an income tax for every stockholder 
whose dividend is thereby diminished, whether he is a millionnaire 
or a poor man. It is clear that the stockholder in such a case re- 
mains subject to the tax, unless some provision is made for refund- 
ing to him the amount paid on his account. Under the English 
law, where dividends or interest have thus been taxed at the 
source, any stockholder or creditor entitled to exemption from in- 
come tax can obtain repayment of the tax thus unduly exacted 
from him, by making application in the proper place and form. 
But no provision of this sort is made in the new act of Congress ; 
and a person supposed to be exempt from taxation under the law 
may, in fact, be subject to taxation on his whole income if, as 
sometimes happens, he receives it all from dividends. No doubt 
the machinery for making a rebate to small incomes in such cases 
would have to be elaborate, and would be difficult to manage — 
more difficult, perhaps, in this country than in one so compact and 

1 Internal Revenue Act of 1864, § 122. 
K 



130 ESSAYS 

homogeneous as England. This, however, is a part of the prob- 
lem of taxation of income at the source that has to be faced 
squarely in even a partial treatment of the subject ; and it is not 
creditable to our legislation that it should have been satisfied with 
the absurd result just pointed out. 

It is hardly possible that the renewed resort to taxation upon 
declaration, under a law of the United States, should not have 
some effect on the current of opinion which has been so long 
gathering in opposition to the analogous practice of state taxation 
of personal property. The wide recognition of the failure of the 
local practice has already been referred to. There has been for 
some years past an increasing disposition in many States to find 
some substitute for this ineffective and obsolete system. What 
will be the effect of the adoption by the United States of the same 
practice of grasping at the intangible ? Will it encourage or dis- 
hearten the movement for local reform, or will the movement pause 
until the issue of the new experiment is seen ? We shall be fortu- 
nate if it proves that the United States have not interposed some 
serious delay in the progress of a change, not likely to be too rapid 
at the best. 

The only remaining feature of the act of 1894 which we have 
to consider is the provision by which the tax is, for the most part, 
to be levied annually on the income, not of the current year, but of 
the year preceding. This is a natural, although not a necessary, 
application of the system of levying upon declared income. In 
theory the accounts of the taxpayer for a year are made up and 
closed. He knows to a penny what his income was ; and it is 
the simplest of financial operations to calculate two per cent of the 
amount, and in due time to pay down this tax. So long, indeed, 
as the law proceeds on the theory of an exact determination of the 
income to be taxed, it is hard to see how anything but the income 
of a finished year can be dealt with. And yet it is probably more 
convenient for the taxpayer that his tax should come as a deduc- 
tion made at the time, from the income on which it is actually 
assessed, and not as a payment to be made from the income of 
another year, which is perhaps less prosperous. 

The English income tax, being levied at the source whenever 
possible, is almost necessarily a tax on current income. The rate 



THE NEW INCOME TAX 131 

fixed by the important Finance Act of July 31, 1894, for example, 
is to be levied on incomes of the year beginning April 6, 1894, 
except in the cases where, for convenience of approximation, the 
average income of two or three years is taken as the basis. Even 
the Prussian law of 1891, which follows in moderation the plan of 
levying upon declaration, calls upon the taxpayer to declare what 
his income is for the current tax year in which the payment is to 
be made. 1 The provisions made, however, by the law of the United 
States on this point are whimsical in the extreme. The tax on 
income derived from dividends and other profits, as well as the 
neglected case of coupons, naturally suggests the collection of 
income tax at the moment when the income accrues and passes to 
the stockholder or creditor ; but the law throws away this oppor- 
tunity by postponing the levy upon the corporation until the first 
half of the next year, when the accounts of the calendar year for 
which the tax is laid shall have been completely made up. But 
for all persons in the service of the United States the income tax 
on the excess of salaries above $4000 is to be withheld from the 
salary when paid, so that for this class of persons and to this 
extent the tax is laid upon the income of the current year, and not 
of that preceding. 2 

The method of taxing income in the year in which it accrues, 
especially if accompanied by the practice of stopping the tax at 
the source of the income wherever possible, brings into view some 
possible conveniences in administration which are lost by the 
method so familiar in this country. Taxes on accruing dividends 
and interest, paid by the debtor, must of necessity be pretty well 
distributed over the fiscal year, offering some advantages to the 
Treasury not to be secured from a tax of which the greatest part 

1 This is easily done of course with all fixed incomes from investments. Variable 
and business incomes are to be returned at the average of the last three years. See § 10 
of the law of 189 1. 

2 It was the intention at one stage of the bill to extend the provision for the deduc- 
tion of the tax from salaries, so as to require some employers besides the United States 
to withhold the tax on any excess of salaries over $4000, and to pay it to the proper 
collecting officer ; and § 28 contains two references to " that portion of any salary upon 
which the employer is required bylaw to withhold, and does withhold, the tax." In the 
final draft of the act, however, as printed at Washington for public use, the provision for 
the payment of the tax by other employers than the United States does not appear, so 
that these two references are without meaning, except as evidence of the haste and con- 
fusion in which this important measure was carried through. 



132 ESSAYS 

falls due at a single epoch. Collected at the natural dividend 
periods such taxes come in by instalments, to the considerable 
relief of the company or person making the payment. It is then 
a natural and easy step to provisions, found both in the English 
and the Prussian systems, for the payment by instalments in some 
other cases, when circumstances make this method convenient. 
Probably for a large part of the community the option of paying 
such a tax by quarterly payments, which is the general rule under 
the Prussian law, instead of the lump sum to which we are accus- 
tomed here, would make the collection a far less formidable pro- 
ceeding than it must now appear as the day of reckoning draws on. 
But beyond this there is another point at which the whole rela- 
tion of the taxpayer to the tax is altered, when the income is taxed 
by instalments in the year in which it accrues. The law of the 
United States allows the deduction from income of " losses actually 
sustained during the year " ; but there can be no deduction for mis- 
fortune incurred in the year when the tax falls due. There is a 
complete separation between the conditions under which the liability 
for the tax accrues and those under which the payment must be 
made. But, where the tax is levied upon current income, it is 
brought into close correspondence with the actual ability of the 
taxpayer. It then becomes possible to provide, in some cases, for 
an increase of the tax where new sources of income are opened to 
the taxpayer within the year, and in some to lighten the tax where 
misfortune has diminished his income since the assessment for the 
year was made. 1 The tax then loses some of its harshness, and 
something of its present aspect of an arbitrary levy, and takes its 
place as a natural and speedy result of the good or bad fortune of 
the year in which it is due. 

It is not worth while, however, to go farther in urging this or 
that point in which the method of levying an income tax in this 
country is defective. The law of 1894 marks no advance in this 
difficult branch of taxation. The whole subject is one in regard 
to which our legislators, national and local, are bound in a singular 
degree by habit and precedent. A practice once adopted becomes 
fixed, an old method is good and a new one is visionary, and the 
appeal to the experience of other countries is pronounced un- 

1 See the cases provided for in §§ 57, 58, of the Prussian law. 



THE NEW INCOME TAX 1 33 

American. The framers of the new law have made no excep- 
tional mistake in resolutely shutting their eyes to what may be 
learned elsewhere on this subject. They have taken the course 
which might easily have been predicted, in going to the legislation 
of the Civil War 1 for the model to be followed at the present time ; 
but they have followed that model without thought or discrimina- 
tion, and without the defence of overwhelming necessity which 
could be made for their predecessors thirty years ago. 

Postscript 2 

The collapse of the income tax of 1894, under the decision 3 of 
the Supreme Court of the United States, has probably caused 
more surprise than grief. Nothing could disguise the fact that, 
considered as a financial measure, the tax was hastily and clumsily 
arranged, and that its provisions defied the teachings both of 
equity and of experience. It offended, as a piece of class legis- 
lation on the one hand, and by its weakness failed to satisfy those 
who demanded such legislation on the other hand. Such strength 
as it had with the public was in a considerable degree sectional, 
and deepened the distrust of many who might have been willing 
to see incomes taxed under more favorable conditions. 

But that the tax should disappear by reason of a construction 
of the Constitution, which practically forbids the levy of a national 
income tax, is an event likely to cause regret, which will strengthen 
with time and reflection. A most valuable financial resource is thus 
lost, for which there is no available substitute — a resource specially 
adapted for use in emergencies and at times when, as in the Civil 
War, indirect taxation is strained as far as it will bear. The decision 
of the court that "direct taxes," in the language of the Constitu- 
tion, is a phrase of wider meaning than had been held in previous 
adjudications, must be accepted. But it follows that, in one impor- 
tant respect, the government established by the Constitution is 
not so strong as it had been supposed to be, and probably not so 
strong as the majority of our people would desire to have it. 

1 For a careful study of the income-tax legislation of the Civil War and the opera- 
tions under it, see Dr. J. A. Hill's article, "The Civil War Income Tax," Quarterly 
Journal of Economics, 1894, p. 416. 

2 Quarterly Journal of Economics, July, 1 895. 

3 Pollock v. Farmers Loan and Trust Company, 137 United States, 429, and 
158 idem, 601. 



134 ESSAYS 

It must be added that the fact that the decision of the court 
in this case was the decision of a bare majority is not the least 
disagreeable circumstance of the case. The possibility that the 
adjudication which thus reversed a previous line of decisions may 
itself be reversed hereafter upon some slight change in the com- 
position of the court is the subject of general comment, and must 
certainly cause much uneasy reflection in the minds of those who 
value the stability and dignity of our judicial institutions. 

From every point of view, then, the attempt to revive the 
income tax by the act of 1894 promises to stand hereafter as a 
conspicuous example of the danger of playing with edge-tools. 



EARLY BANKING SCHEMES IN ENGLAND 1 

The establishment of the Bank of England in 1694, and the 
abortive Land Bank of 1696, were the results of a discussion 
which had left its traces in projects and pamphlets scattered over 
a century. The following notes of a series of banking schemes 
will show how the English mind was long attracted on the one 
hand by the successful operation of deposit banking in Venice and 
Amsterdam, and on the other by the hope of devising some means 
for using landed security as the basis of banking credit 

In Price's " Handbook of London Bankers " (p. 142) is given 
in full the petition of Christopher Hagenbuck and his partners in 
November, 1581, 2 representing that he has found a way to institute 
an office into which much money shall enter every year without 
expense, so that her Majesty can have the use of any needful 
sum, the country be kept in abundance, and usury stopped. The 
petitioner proposes to explain his plan on condition that he shall 
have for twenty years six per cent on the gross sum received by 
the office. The queen agreed to allow four per cent by a grant 
under the Great Seal, but nothing further appears to have been 
done. 

Hagenbuck's petition is in Italian, and he is himself spoken of 
as " an Italian " (p. 147). The petition is dated just three years 
prior to the decree of the Venetian Senate establishing the " Banco 
della Piazza de Rialto," at a time when private banking had shown 
its advantages and its dangers, and when the debate as to the 
substitution of a public bank had probably begun in Venice. It 
is not unlikely, then, that Hagenbuck proposed to import into 
England an idea which had become familiar to him from Venetian 
experience. 

1 Quarterly Journal of Economics, July, 1 888. 

2 This is entered by title in Calendar of State Papers, Domestic, 1581-1590, 
p. 311. 

135 



136 ESSAYS 

Price also gives (" Handbook," p. 145) a series of papers under 
date of May, 1622, 1 in which it is proposed that a bank should be 
established, under the charge of a commission of merchants, where 
the king should receive and make his payments, and merchants be 
invited to leave their money, and where " all payments of 20/. and 
above shall be made, and only an entry made ther of the payment." 

They which receave ther mony at the Bank shal be at ther owne libertye, 
eath r to carry it away, or to leave it ther for the owne use at ther need : If they 
leave it ther they shall by way of assignation pay it over, only by entring it in the 
Bank, which shall goe as an actuall payment, & soe a 100/ may be assigned fro 
man to man to serve for payment of tenn severall ioodred or more. . . . 

The examples of oth r states might teach us the use of this Bank, especially of 
the Venetians & other places in Italye. 

Other references are made in these papers to the example of 
Venice. No action appears to have been taken on the scheme 
of 1622. 

Under the commonwealth, W. Potter published : — 

" The Key to Wealth." Folio, 84 pp. 
"The Tradesman's Jewell." Small 4to, 16 pp. 

" Essay upon a Bank of Lands to be erected throughout the commonwealth. 11 
Small 4to, 6 pp. 

"Humble Proposals." Small 4to, 16 pp. 1651. 2 

The " Key to Wealth " is a prolix discussion, of which the effect 
is seen in the proposition (p. 14) "that an encrease of money can- 
not possibly occasion an encrease in the price of commodities (or 
any other Inconveniences) but by increasing the sale of Com- 
modities." Anything else, the author argues (p. 38), which would 
give as good security for obtaining commodities at pleasure, would 
be as good as money ; and so (p. 45) bills might be issued by a 
company of tradesmen by consent, who should bind themselves 
each to the other to receive and make the bills good. The 
" Tradesman's Jewell " suggests that the bills should be paid within 

1 These papers, numbered 29, 30, 31, and 32, are described in Calendar of State 
Papers, Domestic, 1619-1623, p. 386, where Nos. 29, 30, and 32 are said to be by Sir 
Rcbert Heath, then Solicitor-General. 

My note of the full titles of Potter's pamphlets is mislaid. For the "Tradesman's 
Jewell," see McCulloch's "Literature of Political Economy," p. 159. The "Key to 
Wealth" and "Tradesman's Jewell" are both referred to in the " Humble Proposals," 
and are therefore as early as 1651. 



EARLY BANKING SCHEMES IN ENGLAND 137 

six months after demand, and points out that estates would rise 
from quick trading with bills, and become greater security, — 

Whereby to borrow more Bills to the doubling of such increase, and so 
ad infinitum. 

Now this perpetual doubling the Increase of their stock is of so great con- 
cernment, as though men's Trading should be but ordinary ; yet it will make an 
Estate of 1000/. to amount in 40 years to 500 millions . . . and, by consequence, 
it would make the people of this Nation to be worth in 40 years (the World 
affording but Commodity enough for Money) five hundred thousand times more 
than now they are ; that is, he who is now worth but twenty shillings to be 
worth five hundred thousand pounds and so of others proportionally. 

In his " Humble Proposals " the author makes the pregnant 
suggestion that obstructions in law to transferring bills be removed, 
" to which purpose there is a Petition it seems already presented ; " 
and in the "Essay" he makes a distinct proposition for a land 
bank, of which this is a summary : — 

1. That 100 places be appointed for payments to be made, etc. 

2. That all payments above 10/. or 20/. be required to be made in Bank 
credit. 

3. That there be no way to raise this credit in Bank but by the mortgaging 
of land at 6 per cent. 

Besides giving landed men credit at two per cent (?) and a 
large revenue to the public, this would avoid " all danger of sur- 
prise (as lately in Holland), there being (by the law of the Bank) 
no money to rest there." 

Of very different character is the following : — 

" Seasonable Observations Humbly offered to his Highness the Lord Pro- 
tector. By Samuel Lambe, of London, Merchant. Printed at the Author's charge 
for the Use and Benefit of the English Nation, and to be considered of and put in 
execution as the High Court of Parliament, in their great Wisdoms shall think 
meet. Jan. 27, 1659." x 

Having in mind the rivalry of the Dutch, Lambe finds a bank 
the best means of coping with them : — 

A bank is a certain Number of sufficient Men of Estates and Credit joined 
together in a joint Stock, being, as it were, the general Cash-keepers or Treas- 
urers of that Place where they are settled, letting out imaginary Money at Interest 
at 2 and \ or 3/. per Cent to Tradesmen, or others, that agree with them for the 

1 Reprinted in the Somers Tracts, ii. 164, or in Scott's edition, ii. 446. 



138 ESSAYS 

same, and making Payment thereof by Assignation, and passing each Man's 
Account from one to another with much Facility and Ease, and saving much 
Trouble in receiving and paying of Money, besides many Suits in Law and other 
Losses and Inconveniences which do much hinder Trade. 

He proposes that the management of the bank should be given 
to merchants chosen by the great trading companies of London, 
like the East India, the Turkey, and the Muscovy companies. 

That all be at Liberty to bring in any Money into Bank or not, and if any 
that have Money there, desire to have it again in Kind, should have it at 
Demand. . . . 

That they let out imaginary Money on Credit, upon Ticket, at 2\ and 3/. per 
cent at the most. 

That all Bills of Exchange be received and paid in Bank. 

That all the Profits of the Bank go to the good Men that manage the same, 
in lieu of their great Care and Pains, and defraying Bank Charges, and Officers 1 
Salaries, or so much as shall be thought fitting to be reserved towards the 
Increase of the Stock ; and as the Bank increaseth in Credit, so the Reservation 
to increase to augment the Stock, but the Stock always to remain whole and intire. 

Lambe was satisfied that such a bank would so encourage trade 
and be so convenient that others would soon be called for at Edin- 
burgh, Dublin, York, Bristol, and Exeter, " for the Furtherance 
of Trade, by holding Correspondence with each other, than which 
I do not apprehend or know any way better to equal the Dutch in 
Trade, both at home and abroad." 

Next, we have, — 

" An Expedient for taking away all Impositions and for raising a Revenue 
without Taxes, by Francis Cradocke. London, 1660." 12 pp. 4to. 

Also, — 

"Wealth Discovered : Or, an essay upon a late expedient &c, by F. C. 
London, 1661." pp. viii. 44. 4to. 

In the former of these pamphlets, which is addressed to Charles 
II., the author gives, with little change, the definition of a bank 
already cited from Lambe, and then states his own plan, which is 
somewhat elaborated in "Wealth Discovered." He proposes to 
divide the kingdom into one hundred registry districts, and to make 
the registration of titles and conveyances of real estate compulsory ; 
then to establish a bank, which shall lend its credit upon deposit 
of goods or pledge of lands ; this credit to be by law " as undeniably 



EARLY BANKING SCHEMES IN ENGLAND 139 

current in payment " of debts or for goods as gold or silver, and to 
be given out at three per cent ; but money not to be drawn from 
the bank. 

Now that such credit is as good as Money will appear, if it be observed, that 
Money itself is nothing else but a kind of security which men receive upon parting 
with their Commodities, on a ground of hope or assurance that they shall be 
repayed in some other Commodity : since no man would either sell or part with 
any for the best Money, but in hopes thereby to procure some other Commodity 
or Necessity, (p. 14.) 

The bank credit, he thinks, will not raise the prices of com- 
modities, for they can be imported, but will raise land and lower 
interest. Cradocke says that the books which he has seen on banks 
are Malynes, " Les Mercatoria," Lewis Roberts, " Mappe of Com- 
merce," 1 Henry Robertson [sic], " Trade's Increase/' 2 and Lambe, 
" Seasonable Observations." But all these he finds merely en- 
courage imitation of other countries without proposing increase of 
revenue, whereas by his bank he computes that the public would 
gain a revenue upon loans of ;£ 1,730,000 with little expense. He 
notices Potter, and thinks him an ingenious person, and refers to 
"the shops of Lombard Street (which are banks in effect)." 
That his bank should be erected without the use of money he finds 
to be an advantage ; for gold and silver have their dangers, and so 
have banks which are based on them, whereas land can be made 
to answer much better. 

In "Wealth Discovered" it is stated that April 12, 1661, Cra- 
docke's plan was referred to the Council for consideration ; and 
added to the Council are Francis Cradocke, William Godolphin, 
George Monk, Samuel Hartlib, Henry Ford, Sir Peter Leare, Sir 
William Petty ; but the matter appears to have gone no farther. 3 

1 Lewis Roberts, "The Merchant's Mappe of Commerce, wherein the Universal 
Manner and Matter of Trade is compendiously handled. London, 1638." Fol. 

2 Henry Robinson, " England's Safety in Trade's Increase. London, 1641." 4to. 

3 In the Calendar of State Papers, Domestic, 1661-1662, p. 78, under date of August, 
1661, note is made of a brief description by Sir B. Gerbier d'Ouvilly, of "a Bank of 
Exchange as very beneficial. ... To make the credit of English merchants equal to 
that of foreign, there should be a bank, with a large stock, under fitting governors, such 
as to remove all jealousy of its falling into the hands of those who hold the militia, with 
a coinage of its own, called bank money, and ability to lend on real estate." Sir Bal- 
thasar Gerbier probably made this proposition as the result of his sojourn in the Nether- 
lands during the Commonwealth. 



140 ESSAYS 

In a postscript, Cradocke explains to his readers that he is 
the son, not of Cradocke the preacher to Cromwell, but of another 
of that name who lived " about seventeen years since " in Somer- 
setshire, near Glastonbury, had an estate of ^500 per year, and 
lost his life in the service of the king. He also makes a reference 
to his present " short stay in England." 

The impression produced by the success of the Bank of Venice 
appears strongly in the pamphlets of Matthew Lewis, published 
in 1677 and 1678 : — 

11 Proposals to increase Trade And to Advance his Majestie's Revenue with- 
out any hazard or charge to anybody, and with apparent profit to everybody. 
By M. Lewis. London, printed for Henry Million at the Sign of the Bible in 
Fleet Street. MDCLXXVII." 16 pp. 

This pamphlet proposes the establishment of an office with 
warehouses, where advances in bills of credit may be made upon 
goods for not exceeding twelve months, the bills to be exchanged 
[discounted ?] by the office, if desired, " into Money at four per 
cent." The example of Venice is more than once referred to ; as, 
e.g. (p. 12), " Men desire Credit at Venice (though never answered 
out of the Bank in specie) rather than Money ; because it is more 
safe and more transferrable than Money." Of the moderate 
charge to borrowers, the author says that "this is nothing like 
the borrowing Money to the Scrivener, where the Security is 
usually sealed at a Tavern, and the Borrower pays the Reckon- 
ing." 

" Proposals to the King and Parliament how this Tax of one hundred and 
sixty thousand pounds per Moneth, may be raised, by a Monethly Tax, for one 
Year, without any Charge to any particular person, and with great advantage to 
the whole Nation. This may be done, by setting up Banks here, like the Bank at 
Venice. By M. Lewis, D.D. London. Printed in the Year 1677." 7 pp. 8vo. 

Of this pamphlet, nearly half is taken up with an account of 
the Bank of Venice, apparently resting on the authority of " my 
Intelligencer," but sustainable by "several Venetian Merchants, 
that have lived many years upon the place, and made it their 
business to understand the nature and constitution of this Bank, 
called, Banco de al gero ; A Bank of transferring Credit." 

The writer's plan is that a tax of ;£ 160,000 per month should 
be laid for one year; that banks in every country town should 



EARLY BANKING SCHEMES IN ENGLAND 141 

receive the money, and that the taxpayers should receive bills of 
credit in exchange, these bills to be made current money, and 
Parliament to pledge its faith that money should be raised in 
specie to answer the bills, " if ever it be desired." The case of 
Venice is relied upon to show that, while the government could 
thus have the use of the money obtained by this levy, its credit 
would be a practical and advantageous substitute, saving the tax- 
payers from any inconvenience. 

In the next year, the indefatigable author produced two more 
pamphlets, of which the first is the best known of the series : — 

" Proposals to the King and Parliament, or a large Model of a Bank, Shew- 
ing how a Fund of a Bank may be made without much charge or any hazard, 
that may give out Bills of Credit to a vast extent, that all Europe will accept of, 
rather than Money. Together with some general proposals in order to an Act 
of Parliament for the establishing this Bank. Also many of the great advan- 
tages that will accrue to the Nation, to the Crown, and to the People, are men- 
tioned, with an answer to the Objections, that may be made against it. By 
M. L. D.D. London. Printed for Henry Million at the sign of the Bible in 
Fleet Street 1678." pp. 48. 4to. 

The author here proposes that no payment of ^100 or upward 
should be good in law, unless made in bank ; that the bank should 
lend upon either personal or real security, but should be wary at 
first in giving out credit except for money; that it should be 
empowered to buy lands and ships, to set up "a lomber," and to 
engross the stock of tin and make it into money or ingots to be 
money at the market price. That good security may be had for 
loans, he proposes that the registration of ships, houses, and lands 
should be authorized, all adverse claims to be barred, if not 
brought in within six months after notice given of registration. 
The advantages of registration are discussed incidentally ; and it 
is complained that estates are settled privately and titles made 
uncertain, so that land formerly worth twenty years' purchase or 
more is little above sixteen, though interest is at six per cent. 

Lewis enlarges on the case of the Bank of Venice, which, he 
says, sprung from the dishonesty of bankers. " The Bankers at 
Venice did just as our Bankers have done here, they got Men's 
money into their hands at Interest " and lent it to insolvents or 
"laid it out in desperate cases as our Bankers did"; they broke 
and fled from the territories " as ours do into the Kings Bench," The 



142 ESSAYS 

State therefore set up the bank, which he believes to be " a perfect 
Credit Bank and its Fund a meer imaginary thing," and yet 
" credit in Bank is more safe, more portable, and more transferable 
than money in specie, and so of greater value, as Gold is better 
than Silver." On the difference in rate between bank credit and 
currency, both at Venice and Amsterdam, he dwells at some 
length, returning, however, to the above explanation. 

"A Short Model of a Bank Shewing how a Bank may be erected without 
much trouble, and without any charge or hazard to any body, and with apparent 
profit to every body, except Theeves, Brokers, and griping Usurers, which Bank 
will be able to give out Bills of Credit to a vast extent that all persons will accept 
of rather than Money. By M. Lewis, D.D." [No place or date.] 8 pp. 

This pamphlet refers the reader to " a larger discourse of this 
Model at Mr. Million's," and then gives a summary as follows: — 

The Epitome of this Compendium is, when the Nation is divided into 
Precincts, erect an Office in each Precinct to return Money. 

Order all greater Payments to be made at these Offices, where any person 
may leave his Money without interest, and take a Bill of Credit for it of the 
Office, which shall be made transferable. 

That the Bill of Credit may be current ; let the whole Precinct be obliged to 
make good the acts of their Office, as in case of Robbing. 

That the Precinct may not be damnified, let them choose their own Officers, 
who shall give security to them. 

They shall also choose four and twenty substantial persons to meet once a 
Month to supervise their stated Officers. 

These four and twenty shall dispense Money lying dead in the Office, as oft 
as they please. 

Much of the running cash of the Nation will in a little time pass through 
these offices, and all that can will leave it there, and take a Bill of Credit 
of the Office : because this Bill of Credit will be more safe, more portable, more 
transferable, and so of greater value than Money, as Gold is (for these reasons) 
better than Silver. 

Hence these Officers will have a vast Credit, which is equivalent to so much 
Money in specie, and may do whatever any can do, that have an inexhaustible 
treasure. 

To these notes the better known schemes of Briscoe and Cham- 
berlayne are the proper sequel; but it is unnecessary to pursue 
the subject. Before the close of the seventeenth century, the rise 
of private banking had done much to clear the public mind, the 
land bank scheme was sanctioned only in modified form, and 
the establishment of the Bank of England had come about as the 
natural result of experience and the final prevalence of sound ideas. 



THE BANK OF VENICE 1 

An often repeated and long accepted legend respecting the 
origin of the Bank of Venice carries back the history of that 
remarkable institution to the latter part of the twelfth century. 
A public debt, contracted not far from 1171, is said to have been 
made transferable like a modern registered debt, then to have been 
found useful as a medium of payment, to have become the nucleus 
of a system of deposits and transfers of money, and so to have 
developed into a bank of deposit of the primitive type, holding a 
place of great though variable importance in European commerce 
for more than six centuries. With this legend have been joined 
confused and often contradictory statements as to a "money of 
account" of mysterious nature created by the bank, and the 
superiority of this "imaginary money" to actual cash in hand. 
Owing, perhaps, to the aversion of the Venetian government to 
anything like publicity in the management of its business, even 
the Venetian historians were sometimes misled by the tradition ; 
and it is, therefore, not surprising that writers in other countries 
followed it with little question. 

The researches of Lattes and Ferrara in the archives of the 
Frari destroyed the familiar legend twenty years ago ; and the date 
and manner of the establishment of the Bank of Venice were then 
settled as definitely as the chartering of the Bank of England. 
The traditional fable has perhaps been more persistent in English 
than in any other language, still holding its place in the most 
recent encyclopaedias, English and American ; 2 but elsewhere it is 
effectually discredited, and ceases to adorn the history of mediaeval 
banking. It would hardly be worth while, then, to revive the sub- 
ject here, were it not for the light which the documentary evidence 

1 Quarterly Journal of Economics, April, 1892. 

2 McLeod, " Dictionary of Political Economy," p. 69, rejects the fabled connection 
of the Venetian monti of the twelfth and succeeding centuries with the beginning of 
public banking in 1587; but his erudition has often failed to command proper attention. 

143 



144 



ESSAYS 



throws upon the early practice of private banking in Venice and 
upon the place which the public bank and its credit really held in 
the commercial organization of the city for the last two centuries 
of Venetian independence. 

The leading documents relating to this subject, which are now 
within reach of the public, may be classified as follows : — 

1. A series of acts of the Venetian Senate, nearly forty in 
number, ranging from the year 1270 to 1530 and regulating the 
business of private bankers, brought to light by Professor Elia 
Lattes, and reprinted by him, apparently with great fidelity to the 
text of the original records, in his work, " La Liberta delle Banche 
a Venezia dal secolo XIII al XVII," published at Milan in 1869. 

2. A mass of original papers relating to Venetian private 
banks from the fourteenth century to the end of the sixteenth, 
collected from public and private sources by Professor F. Ferrara, 
and published by him in part in the Archivio Veneto for 1871, and 
also used by him as material for a paper on the ancient banks in 
Venice, published in the Nuova Antologia for January and Feb- 
ruary, 1 87 1. 1 

3. The acts of the Venetian Senate of 1584 and 1587, under 
which the first public bank in that city, the Banco di Rialto, was 
established ; several other acts regulating the affairs of that bank ; 
a speech made in the Senate, in 1584, by Tommaso Contarini, in 
favor of establishing a public bank ; and a speech, by an unknown 
senator, opposing such an establishment. These are collected and 
printed with great care by Lattes. 

4. The act of the Senate of May 3, 16 19, establishing by the 
side of the Banco di Rialto a second public bank, known as the 
Bancogiro, or Banco del Giro, which ultimately became the only 
public bank of the city and was famous throughout Europe for gen- 
erations as the Bank of Venice. This act is also given by Lattes. 2 

5. The rules and regulations of the Bancogiro, put in force by 
the Senate and published by its authority in 1663, and also given 
by Marperger, in his " Beschreibung der Banquen." 

1 Ferrara explains with great frankness that, in his introduction of Volume VI., 2d 
Series, of the Biblioteca degli Economisti, he had himself helped to propagate the 
favole which Lattes destroyed by irrefragable proofs. See especially Ferrara's " Awer- 
tenza Preliminare," in the Archivio Veneto, vol. i. 

2 A translation may be found in the Quarterly Journal of Economics, April, 1892. 



THE BANK OF VENICE 145 

6. A discourse upon the Bancogiro communicated by the 
French ambassador in Venice to his own government in 1786, and 
referred to by Daru in his " Histoire de Venise," but printed for 
the first time in the Appendix of the Quarterly Journal of Eco- 
nomics for April, 1892, and containing the fullest contemporary 
account yet published of the bank and its methods in the last 
years of its existence. 

These documents present a distinct picture of banking in its 
true sense, as an entirely spontaneous growth during the flourish- 
ing period of Venetian commerce, carried on by private individuals, 
and exhibiting the mixture of advantages and abuses which have 
been its familiar results in every country and age ; and they also 
show the Bank of Venice to have been established, not by gradual 
development or chance, but by deliberate purpose, in order to take 
under the guarantee of public authority some of the functions 
which for two hundred and seventy years or more had been per- 
formed by private bankers. 

It is tolerably clear that private banking in Venice began as an 
adjunct of the business of the campsores, or dealers in foreign 
moneys. In a city having a great and varied trade with many 
countries, these dealers necessarily held an important place, close 
to the stream of payments which was constantly in motion. As 
early as 1270 it was deemed necessary to require them to give 
security to the government as the condition of carrying on their 
business, but it is not shown that they were then receiving deposits. 
In an act of September 24, 13 18, however, entitled "Bancherii 
scriptae dent plegiarias consulibus," the receipt of deposits by the 
campsores is recognized as an existing practice, and provision is 
made for better security for the benefit of depositors. 1 Whether 
the title of this act is contemporary or not, its text shows that 
somewhere between 1270 and 13 18 the money-changers of Venice 
were becoming bankers, by a method similar to that by which the 
same class of men in Amsterdam a couple of centuries later, and 

1 The acts of March 8, 1270, and September 24, 13 18, are given by Lattes, pp. 26, 
28. Lattes thinks that the " natural scope " of the former covers security for depositors. 
The opinion of Ferrara is to the contrary {Nuova Antologia, January, i87i,p. 183) ; and 
it does not appear that any direct evidence has been found to show that in 1270 the 
campsores were receiving deposits, although the occasional possession and use of money 
belonging to others must have become an incident of their business very early. 
L 



I 4 6 ESSAYS 

later still the London goldsmiths, became bankers. More than 
once in the next half-century provision was made for some public 
oversight of the campsores, and in the acts the terms bancheriiis and 
bancus became frequent in what seems to be a technical use. The 
number of bankers appears finally to have become considerable ; 1 
and the terms bancus scriptae and bancheriiis scriptae came into 
use in the sense which, in their Italian equivalents (as banco di 
scriita or banco di scrittura\ they held for centuries, denoting the 
banker who keeps written accounts of transferable deposits. 

The documents brought to light by Lattes and by Ferrara 
give us the names and tell something of the checkered fortunes of 
a considerable number of these private banks which flourished 
between 1348 and 1584. Some of them belonged to families or 
men of high standing, as the banks of Soranzo, Priuli, Pisani, 
Lippomano, Vendramin, Sanudo, and of Pisani and Tiepolo; 
some of them stood in close relations and high favor with the 
government of the day ; several of them went through the phases 
of failure, reorganization, and resumption more than once ; and, 
in fine, of the banks now known by name Ferrara was only able 
to find one, the house of Soranzo, which after an existence of over 
a century closed its affairs by payment in full, — a trombe e pifferi. 
The list as we now have it comprises rather more than twenty 
names, including probably the most important. But the speech 
of Tommaso Contarini in 1584 2 sets the number of banks known 
to have existed at one hundred and three, "of which ninety-six 
have come to a bad end and only seven have succeeded." And 
yet, notwithstanding a train of disasters nearly two centuries and 
a half long, the service rendered by the banks to commerce had 
been such, on the whole, as to lead Contarini to argue that to pre- 
serve the trade of the city without banking was not only difficult, 
but impossible. 

A series of acts beginning in the fourteenth century and run- 
ning through the fifteenth and sixteenth show plainly that this 

1 This is to be inferred from the language, explicit, if not classical, of the act of 
August, 1374, giving the bad condition of the banks as a reason for placing them under 
the charge quinque sapientum : " Quia est providendum de necessitate pro bono terrae 
nostrae et mercatorum et mercationum etiam nostri communis super facto bancorum 
Rivoalti, quae non possent stare in peiori termino eo quod sunt ad praesens Consideratis 
damnis et incommodis, quae fiunt toti terrae," etc. See Lattes, p. 33. 

2 Ibid., p. 124. 



THE BANK OF VENICE 147 

service was rendered by means of deposit accounts. How early 
the convenience of making payments by transfers on the books of 
a banker was understood there is nothing to show. An act of 
1403 a recites that great sums are placed in the hands of the 
bancherii scriptae ; and an act of 1421 2 deals with some evils which 
had arisen, in terms which imply not only the receipt and pay- 
ment of deposits, but their use in payment of bills of exchange. 
In 1445 3 it was thought necessary to require the bankers to be 
present daily for a certain number of hours, and a penalty was 
imposed se non sentaranno et scriveranno as required, in conse- 
quence of the loss to merchants occasioned by their irregularity. 
Passing by numerous acts for regulating or reforming the banks, 
we come to an act of 1526, entitled " Ordinationes circa bancos a 
sc? Vta," and evidently designed to restore regularity and honesty 
in a long-established business. In this act we find the following 
provisions, 4 showing distinctly the form which banking transactions 
had then taken : — 

7. It shall be free for every one to accept or not accept a credit in bank 
{partida de banco) for contracts made heretofore ; but this shall not be refused 
for those made hereafter, unless by express agreement it shall have been declared 
that payment shall be made outside of bank. 

8. Credit in bank shall not be written off to any one for any amount in his 
absence ; but credits shall be written with both parties present. 

9. Bankers, as aforesaid, must pay, to those who wish, in cash at once and in 
hand their money in good and heavy gold, or good moneys at the market rates, 
or rates current at our offices ; and, if any should refuse, they shall be subject to 
the penalty of twenty-five ducats, and the proveditor then present shall none the 
less make them pay. 

But the language in which Contarini discusses the usage of 
Venetian merchants is enough to show that in 1584 the transfer 
of credit had long been an important means of payment. A com- 
parison made by him with the practice at Antwerp and at the 
Lyons fair makes it certain also that, in his mind, the convenience 
to be obtained by the use of credit did not arise from any such 
substitution of credit for money as should enable the community 
to dispense with any part of its stock of cash, but from the simple 
fact that the transfer in bank saved the necessity of counting coin 
and of its manual delivery in every transaction. The coin itself 

1 See Lattes, p. 44. 2 Ibid., p. 47. s Ibid., p. 56. 4 Ibid., p. 91. 






148 ESSAYS 

had been deposited as the foundation of the credit, and was to be 
paid on delivery : the creation of a credit without such deposit 
was in his view an abuse ; but payments could be made by the 
transfer of the right of the depositor to demand, with such facility 
as to enable merchants to carry on dealings to an extent otherwise 
impossible. " Buyer and seller are satisfied in a moment, while 
the pen moves over the page : whereas a day would not be enough 
to complete the contract for a great mass of merchandise by count- 
ing a great number of coins." To this simple but important use 
of bank credit the Venetian Senate was unable to restrict the pri- 
vate bankers ; and it was to secure the advantage of payment in 
this convenient form, without the risks of private mismanagement, 
that, as we shall see, the public bank was afterwards established. 

The nature of the case, however, gave a much wider scope to 
the business of the private bankers than the primitive function of 
deposit-keeping. " Those who open banks," says Contarini, " do 
not undertake this labor, and subject themselves to the burden of 
being cashiers for all the money in the market merely for the sake 
of holding it, but in order to trade with it, and by trading to make 
gains." In 1374 an act forbids any one qui teneat bancum de 
scripta to be concerned in any way in dealings in copper, tin, iron, 
lead, saffron, or honey, or in the purchase of silver at public sale. 1 
This prohibition was somewhat relaxed by the Senate in 1386, 
1387, and 1390 ; 2 but in 1403 an act was passed forbidding any 
banker to ship or send away by land either merchandise or money 
beyond the amount of one and a half times the loans which he 
might have made to the republic. 3 This singular restriction, which 
is treated by Lattes as a remarkable anticipation of the legislation 
of the United States requiring from national banks a deposit of 

1 Lattes, p. 34. Lattes supposes the fluctuating price of these articles and the dif- 
ficulty of converting them into cash at all times to have made them unfit, in the opinion 
cf the Senate, to be held by bankers. Ferrara has the well-grounded opinion that, besides 
hindering bankers from placing deposited money in trade, the Senate also wished to 
prevent any monopoly of certain articles of great importance. Nuova Antologia, Janu- 
ary, 1 87 1, p. 187. 

2 See Lattes, pp. 39-41. The act of 1386 recites that the house of Soranzi have 
petitioned for some relief for the bankers because " ipsi sunt onusti mercationibus olei, 
et aliis mercationibus, de quibus male possunt exire, si ipsas ad ferrum, et alia barrattare 
non possunt, sicut alii cives nostri," and because of the small gains of banking. In 1430 
the law was again relaxed at the instance of the Soranzi. Lattes, p. 55. 

3 Ibid., p. 44. 



THE BANK OF VENICE 149 

public securities, is at any rate important as showing a wide range 
of investment opened to the bankers in 1403, provided the public 
securities bore a certain proportion to the whole. The laws show 
other traces of loans made by the banks to the republic ; and 
Ferrara's researches enabled him to compile a list of such loans 
for the years 1457 to 1507, amounting to rather more than five 
million lire of the present day. 1 But the language of Contarini is 
enough to show the variety of methods in which the bankers used 
the funds confided to them by depositors. Trade with the 
Levant, the western trade, corn, exchange, the accommodation of 
friends, the purchase of lands and houses, — these were typical 
classes of a banker's investments in that age. That loans to indi- 
viduals had some place among the bankers' use of capital is shown 
by an act of 1467, limiting to ten ducats the amount which could 
be lent to any person upon a single obligation. 2 But the restric- 
tions imposed by the canon law upon the reservation of interest 
impeded loans of this kind, and probably hindered the definition 
and even the growth of legitimate banking investments. Mercan- 
tile adventure long continued to be the banker's natural employ- 
ment of his funds ; and the dangers of such employment, pointed 
out with great distinctness by Contarini, were keenly felt by the 
Venetian public century after century. 

Nothing shows when the Venetian bankers first learned that, 
besides the money actually received from depositors, they could 
also make use of credits opened on their books, but not represent- 
ing any deposit, and when they began in this manner the modern 
system of issue. The idea must have come soon after the trans- 
fer of deposits became common. The act of 1374, forbidding 
bankers to deal in certain commodities, declares that the banker 
shall nee mutuare nee facere scriptam argenti alicui qui emeret ar- 
gentum ad campanellam, — shall neither lend nor open a written 
credit for the prohibited purchase. Another act, of 1450, forbids 

1 Nuova Antologia, January, 1871, p. 205. The loans noted by Ferrara are those 
mentioned in scattered documents, and it is certain that their amount is far below the 
real total. 

2 Lattes, p. 72. "... Accomodare non possint alicui personae maiorem summam 
ducatorum decern sub uno quoque signo." On the somewhat doubtful meaning of this 
limitation, see a remark by the late Professor Nasse in his review of early Venetian bank- 
ing in Jahrbucher fur Nationalokonomie, 1880, p. 338; and Ferrara's remark, Nuova 
Antologia, 1 87 1, p. 452. 



150 ESSAYS 

the giving of credit, either to any foreigner or any citizen, for the 
purpose of purchasing silver, except for such money as he shall 
really have in the bank. 1 These limitations upon the extension of 
credit for some purposes imply strongly that its extension was a 
recognized practice for other purposes ; and we learn from Con- 
tarini that, in the sixteenth century at any rate, such was the case. 
The banker, he says, can accommodate his friends without the 
payment of money, merely by writing a brief entry of credit. The 
banker can satisfy his own desires for fine furniture and jewels 
by merely writing two lines in his books, and can buy estates or 
endow a child without any actual disbursement. 2 In short, the 
Venetian private banks had become banks of issue, and the bank- 
ers found many temptations in the way of a prudent use of this 
power. 

The immediate effect of the over-issue, to which the bankers 
were thus tempted, would of course be a difficulty in meeting the 
demands of depositors and the resort to expedients for avoiding 
payment. Embarrassment of this sort, as well as actual fraud, is 
probably the explanation of a long series of practices legislated 
against by the Venetian Senate. When, in 1445, 3 the bankers were 
required to be present for business daily, at least two hours in the 
morning and two after dinner, instead of presenting themselves 
merely quando et quanto voleno, we may be sure that the Senate 
intended, among other things, to provide for depositors who might 
wish to draw out their money. The requirement in 1467 that 
bankers should show to any person the books containing his ac- 
counts and balances, rationes et resta sua ; 4 the strict provision in 
1523 that the bankers should have ready on the counter, sopra li 
banchi tenir conveniente y the money for making their payments in 
full and publicly, 5 and must count it out sopra il banco or be 
responsible for any deficiency sworn to by the payee, — these 
provisions may have been directed against debtors avoiding pay- 
ment either from embarrassment or fraud. But when the law of 
1526 declares that bankers shall not, upon a demand for cash, 

1 Lattes, p. 34, note, and p. 70. 

2 So, too, in the speech against the establishment of a public bank published by 
Lattes, " i mercadanti si servivano della commodita dei banchi particulari, scrivendo 
partide, seben non havevano alcun credito in banco, 6 seben il credito era inferior assai 
a i danari, che scrivevano ad altri." Lattes, p. 152. 

3 Ibid., p. 56. * Ibid., p. 72. 5 Ibid., p. 82. 



THE BANK OF VENICE 151 

send the creditor to another bank with an order upon it, and so 
wear him out by sending him from one to another, nor say that 
there is an error and that accounts must be compared, nor delay 
or refuse to transfer to a person likely to demand actual payment, 1 
we are instantly reminded of the shifts of insolvency. The 
repeated increase of the security to be given by bankers, which in 
1523 had risen to 25,000 ducats; the summary jurisdiction over 
questions between bankers and depositors, given, by various acts 
from 142 1 to 1523, to designated public officers; and other pre- 
cautions into the detail of which it is impossible to enter, — all 
show that the republic was painfully aware that prompt payment 
was not always the first object of the Venetian banker. How 
much the republic accomplished by its efforts to regulate the 
banks is doubtful. In one or two cases the preambles of acts 
naively admit the non-observance of previous legislation. 2 It is 
enough for the present purpose, however, that the laws disclose 
the presence, in the Venetian private banking, of precisely the 
same evils and mistakes as those with which later centuries have 
had to struggle. 

With a system of banking obligations on which payment is 
avoided or suspended, depreciation is a natural result. There is 
reason to infer from the law of 142 1 3 that this evil had then 
shown itself; for the law explains that, as money cannot be 
drawn from the banks, there is a practice of selling credits held 
against them, with great injury to the state. The evil appears 
more clearly in 1523, when the law declares 4 that the banks shall 
make their payments without deduction for cash,_/#r li pagamenti 
integri et senza alcuna diminnzione, and also forbids the purchase 
or sale of cash with bank credits, — a prohibition which implies a 
difference in value, and hence a depreciation of the credit. But 
the " Ordinationes circa bancos " of 1526 5 declare in so many 
words that the extortion practised by the bankers upcn those 
wiio wished for money had then reduced the bank credit twenty 
per cent below the level of cash. The remedy applied was 
vigorous. The number of the sopra banchi already in office as 

1 Lattes, p. 92. 

2 See especially Lattes, p. 69, where, in 1447, it is said of an act of 1421, " Sicut 
notum est talis ordo nunquam fuit observatus, nee presenti tempore observatur." 

8 Lattes, p. 47. 4 Ibid., p. 82. 5 Ibid., p. 89. 



I 



152 ESSAYS 

inspectors of the banks was increased, so as to give one for each 
bank, their presence day by day during banking hours was 
required, and large powers were given to them. Dealings in 
bank credit with an agio for cash, con alcan laza> were then for- 
bidden. It was ordered that exchange should be sold at one price, 
whether for cash in hand or in bank, and that payments for goods 
or for other cause should be made in the same way, the bank 
credit to be taken, if at all, on the footing of cash, ducat for ducat, 
the bankers being at the same time required under penalty to 
maintain their payments in cash. In the preamble of a law 
respecting money-changing passed in 1528 1 it is recited that 
these provisions had brought the bank ducat and cash to equal- 
ity of value. Two years later a law respecting bills of exchange 
makes the same recital, but adds that at the Lyons fair bills had 
been drawn payable in bank with a difference of two and a half 
per cent, and therefore requires that bills drawn payable in bank 
shall be settled at the rates current for bills made payable in cash. 
Contarini's statement as to the large proportion of the Venetian 
banks which ended in failure has already been noticed. Details 
of the failure of several have been collected by Ferrara, the cases 
of the Soranzi, Garzoni, and Lippomani being the most remarkable. 
The winter of 1498- 1499, when the two latter failed and the Pisani 
had in consequence to meet a run by depositors, 2 appears to have 
been a season of panic upon the Rialto. There are also indications 
of serious trouble not far from 1523. In 1584 came the failure of 
the house of Pisani and Tiepolo for 500,000 ducats, and this event 
apparently brought private banking in Venice to its end. Its his- 
tory, if we may judge from the fragments which have survived, was 
a tale of repeated disaster ; and yet it must be remembered that 
the events which appear to us now as parts of a single picture 
were, in fact, spread over the greater part of three centuries, dur- 
ing which the Venetian public continued to intrust its interests to 
the private banks. It may be, therefore, that, if we could restore 
the proper perspective of time and could see these disasters in their 
true relations to other events, the Venetian experience might not 

1 Lattes, pp. 95-97 : " Essendo per 1' iddio gratia riddotti li banchi nostri de scritta 
in buon esser, che tanto e al presente il ducato del banco, quanto e il contado." 

2 A lively account of this run, given by Malpiero and cited by Ferrara, may be found 
in the Archivio Storico, Ser. I., vol. vii., p. 715. 



THE BANK OF VENICE 1 53 

appear more unfortunate or even more checkered than that of 
other countries, which have had to learn by actual trial how to 
use the dangerous forces of credit. 

But, however this may be, the Venetian Senate became satisfied 
of the necessity of a radical change of system. The speeches of 
Contarini and his unknown opponent were part of a debate which, 
in a few months after the failure of Pisani and Tiepolo, ended in 
the act of December, 1584, for the establishment of a public bank, 
to be called the Banco della Piazza di Rialto. This act was re- 
pealed in the following April, in consequence of strong opposi- 
tion ; and it would appear that the city was left for the next three 
years without any bank, either public or private, to the great con- 
fusion and injury of its business. The act of April 1 1, 1587, at 
last established a bank of deposit, sometimes called the Banco di 
Rialto, and sometimes the Banco della Piazza. 1 The acts of 1584 
and 1587 differed in some important particulars, but they agreed 
in their main purpose of giving to a public institution the deposit 
business so long retained by the private bankers; and we can 
therefore conveniently confine our attention now to the act of 
1587, as expressing the meaning of the revolution in Venetian 
banking which took place in 1584. 2 

The act of 1587, after reciting the mischiefs resulting from the 
ruin of the private banks, the great need of a bank of some kind, 
and the conclusion that private banks could not supply the want, 
establishes a banco de scritta for three years, to be placed under the 
charge of a governor elected by the Senate for the same term, and 
under the inspection of the Proveditori soprabanchi. The bank 
was required to receive all cash deposits offered in good and cur- 
rent money; the money was to remain always subject to call, 

1 The acts of 1584 and 1587 are given in full by Lattes, pp. 101 and 109. 

2 Morosini, in his " Historia Veneta," under the year 1587, says: " Negotiatorum 
quoque incommodo subvenire decretum, qui, apud privatos mensarios pecunia deposita, 
eorum fraude, avaritia, crebrisque decoctionibus ingentes jacturas damnaque patiebantur; 
ex quo publicis etiam redditibus haud parva detrimenta accedebant. Itaque lex lata in 
Senatu, ut publica mensa erigeretur, in qua tuto singuli argentum aurumque adservarent; 
ei Gubernator praeficeretur, qui rite atque ex ordine cuncta administranda curaret ; id 
munus Francisco Gradenico primum tributum." But Morosini takes no note of the 
establishment of the Banco del Giro in 1619, and perhaps supposed that bank to be the 
same as the " mensa " of 1587. 



\ 



154 ESSAYS 

sempre pronto a requisition di creditori ; transfer in bank could 
be made, but only in the presence of the depositor or by his 
written consent lodged in the office of the soprabanchi ; no 
transfer could be made in blank, but credit must be given in 
account to the transferee at the same time that the transfer was 
debited ; and, finally, the expenses of the establishment were to be 
met by means of the duties on imported goods. In December, 
1 593, a further act provided that all bills of exchange should 
thenceforward be paid by transfers in bank only. It is evident 
from these provisions that the Bank of the Rialto was not a bank 
in the modern sense, as the private banks superseded by it had 
been. The republic wisely declined to undertake the investment of 
the funds intrusted to it, sought no profit from the use of its credit, 
and, in short, merely undertook to keep the money of depositors 
in safety, and to pay it out or transfer it to others at the will of the 
owner. At a given moment the depositors might even draw out 
the whole of the cash, in full satisfaction of their claims, if they 
chose, and nobody would be any the worse. 1 Certain of the 
functions of the private banks were thus selected and made the 
work of the new establishment, and the rest were disregarded. It 
is clear, then, that this development of the Venetian public bank 
from the business carried on in private hands had no possible 
relation to any public debt or to any use which the state might 
be able to make of the moneys deposited with it. 

The provision made in 1593 as to bills of exchange, already 
referred to, was for two centuries an important regulation of 
Venetian commerce ; but it had its origin from a special cause. It 
is manifest that, so long as the Bank of the Rialto should be con- 
ducted in accordance with its fundamental law, payments in bank 
must be the exact equivalent of cash payments, since the payee in 
bank received a credit convertible into cash at pleasure. Debtors 
who found it inconvenient to meet their debts with cash would 
therefore find it equally inconvenient to meet them with a transfer 
in bank. This led to a practice of settling bills of exchange by 

1 It is worth noting that the governor of the bank was forbidden under heavy pen- 
alties to traffic in, use, or lend any of its moneys. Lattes, p. no. Contarini's discussion 
as to what might happen in case of war, and his assertion of the ability of the bank to 
pay everything on demand, tanto sard il da?', quanto V haver, is important as showing 
that commercial and not fiscal convenience was the purpose of the undertaking. See 
Lattes, p. 137. 



THE BANK OF VENICE 1 55 

novation, or the substitution of one debtor for another, like that 
described by Contarini as existing in Antwerp. 1 An act of Novem- 
ber, 1593, says, " There has been introduced within a short time a 
notable abuse in the Piazza di Rialto : that payments for exchange 
and merchandise, which ought to be made by accounts in bank or 
in cash, are made by a kind of transfer in which debtors assign to 
their creditors each one his debtor, and this debtor assigns another, 
and so on," to the great embarrassment and injury of creditors 
who really wish for their money, se il creditor viwl valersi del sno 
per qualche bisogno. This transfer (giro) of debts, when cash was 
really due, was therefore forbidden ; and a few days later the act 
of December 14, 1593, 2 after a similar recital of the evil, made the 
well-known requirement for payment in bank of all bills of ex- 
change, under severe penalty. The increase of transactions thus 
thrown upon the bank compelled the Senate, in April, 1594, to 
authorize an increase of clerical force in the bank ; and they then 
took occasion to require that not only all letters of exchange drawn 
upon Venice, but all bills of a similar kind drawn at Venice and 
sold, should be settled for in bank, thus making payment in bank a 
legal tender for all commercial paper of this class. 

The question whether the public bank with its restricted func- 
tions should have the sole occupation of the field of banking was 
finally decided by convenience rather than by deep policy. The 
act of 1584 had forbidden the establishment of private banks, 
restando 7teW avenire prohibito del tutto a particolari il levar piu 
banchi ; 3 but this act being repealed, and the act of 1587 contain- 
ing no such prohibition, the establishment of private banks may 
be said to have become possible, although for several years bankers 
were not forthcoming. But in February, 1 596-1 597,* the Senate, 
after reciting the impossibility of meeting all the needs of com- 
merce by means of a single bank, gave to Dionisio Contarini, who 
had served as governor of the public bank, leave to establish a 
private bank for six years. The banker bound himself to give 

1 See Lattes, p. 121. 

2 For the two acts of 1593, see Lattes, pp. 170, 171. In ColwelFs "Ways and 
Means of Payment," in a chapter on the Bank of Venice, the date of this act is given 
on the authority of Savary as 1423. Mr. Colwell, adopting the traditional account as to 
the great age of the bank, easily accepted a date which carries the act back to a time 
when there was no public bank in Venice, and long before the establishment of any such 
provision as to exchange. 3 Lattes, p. 102. * Ibid., p. 177. 






156 ESSAYS 

security to an extent declared to be unexampled, and to supply the 
mint annually with an agreed quantity of gold and silver. All his 
receipts and payments were to be in good money of lawful weight, 
he was to undertake no public contract for merchandise, and pay- 
ments offered by transfer upon his accounts were to be receivable 
only at the pleasure of the payee. Nothing more has yet been 
brought to notice respecting Contarini's bank ; but in 1619 the 
Senate again gave a companion to the Bank of the Rialto by the 
act of May 3, creating the famous Banco del Giro, — the great 
public bank whose origin is so often said to date from the twelfth 
century. 1 The two banks, organized separately, but with similar 
powers, continued to work side by side until 1637, when the Bank 
of the Rialto was discontinued in consequence of the absorption 
of its business by the Bancogiro ; 2 and the latter was then left as 
the sole occupant of the field. 3 

The circumstances under which the Banco del Giro was estab- 
lished are stated in general terms in the preamble of the act. 
Giovanni Vendramin had contracted to supply to the Venetian 
mint a large amount of silver, in bulk or in Spanish reals, and to 
receive payment, one-half in coin or in bank credit, and the other 
half in gold, either coined or in bars ; and, as the rate at which he 
supplied the silver was low, the republic agreed to make him a 
large loan in bank credit. At the same time there were merchants, 
to whom the republic was indebted for goods and for bills of 
exchange, who had received assignments upon the mint and other 
public offices, the collections upon which were slow and embarrassed 
by official forms. To make a prompt settlement with Vendramin 
and with the other creditors, the new bank was created, and placed 
in charge of an officer called the Depositario del Banco del Giro ; 
and the creditors were paid by being credited with deposits on its 

1 The act is given in full by Lattes, p. 183. As for repetitions of the legend re- 
ferred to in the text, it is enough to cite among the latest, " Encyclopaedia Britannica " 
(9th ed.), iii. 316; Appleton's "American Cyclopaedia," ii. 273; " Dictionnaire des 
Finances" (1889), i. 291. 

2 Rezasco, who made a diligent search in the Venetian archives for matter relating 
to the two public banks, cites the order abolishing the Bank of the Rialto as dated 
January 2, 1637. "Dizionario di Linguaggio Italiano Storico ed Amministrativo," p. 85. 

3 The Banco del Giro was so named, as has often been explained, because of the 
continual movement of credit by transfer from one depositor to another. The name 
distinguished the bank from the Banco della Piazza, but the practice referred to by it 
was in no way peculiar to the new bank, as has been shown already. 



THE BANK OF VENICE 1 57 

books. To enable the bank to meet the demand for payment to 
which it was thus exposed, a large sum in reals received from 
Vendramin was exchanged at the Banco di Rialto for current 
money ; and this, with coin struck from silver in bulk supplied 
under Vendramin's contract, was placed in the Banco del Giro, to 
the extent of 1 50,000 ducats, as a reserve. It was also provided 
that payments of 10,000 ducats per month (increased soon after- 
wards to 30,000 ducats) should be transferred from the mint to the 
bank, until the sum of 500,000 ducats, the amount of the payments 
to be made to public creditors, should be covered. 1 

The greater part of the act of 16 19 relates to the organization 
of the bank and the duties of the officers to be appointed ; and 
there is little pains taken to explain the functions of the institution 
so carefully officered and guarded. There is enough on the face 
of the act to make it clear, however, that the Banco del Giro was 
to be a deposit bank of the familiar type, holding, transferring, 
and paying deposits at the call of the depositor, like the existing 
Banco di Rialto, but performing no other of the functions of 
banking : — 

That in this new Bank it shall not be allowable to exact any charge {non si 
possi scuoder) from merchants, but only to pay in cash, except to those who 
have overdrawn. 

That no one shall refuse payment, in said Bank, of his credits, from one 
hundred ducats upwards. 

That transfers of any amount may be made, although of one hundred ducats 
or less, at the convenience of merchants, provided the parties are agreed. 

And, as the reason for establishing the large reserve described 
above, the law premises, — 

Since one of the chief and most necessary considerations as to this Bank for 
the public and for the private interest is, that such a sum be assigned to it that not 
only private individuals may receive promptly whatever sum of money they may 
need to draw for the day, but that always, in case it should seem good to this 

1 These transactions can be made out with reasonable clearness from the preamble 
and the last four sections of the act of 1619 establishing the bank. An account is given 
of them by Rezasco, p. 82, with some details as to Vendramin's contract obtained by 
examination of the original. There is also a brief account given in a short memoir on 
the public banks, written near the end of the seventeenth century by the senator Ber- 
nardo Trevisan, and published under the title of " Informazione per il Banco del Giro " 
in Vigano's translation from Sonnleithner, " La Scienza del Commercio," p. 293. 



158 ESSAYS 

Council to proceed to close the said Bank, the Capital may be ready in sufficiency 
to pay to every one his just due, 
Therefore, be it ordered, etc. 1 

These provisions undoubtedly contemplated the establishment 
of a cash-paying deposit bank, of which the reserve was supposed 
to be sufficient at the start for all probable demands, and was to 
be increased to the point of equality with the total liability. The 
credit of the bank was to be sustained, therefore, not only by the 
good faith and policy of the republic, but ultimately by the actual 
presence of all the money which the credit might represent. This 
system contained the least possible mystery, either as regards 
theory or practical operation ; and the Bancogiro would have been 
simply a second Bank of the Rialto but for the fact that the debts 
of the republic to Vendramin and the other public creditors were 
the occasion for its creation. As it was, instead of opening for 
business with neither liabilities nor cash on hand, as a simple bank 
of deposit might have opened, the Bancogiro began with a large 
liability upon its books to certain creditors of the state, and with a 
considerable resource in cash, which the state agreed to fill up to 
the full amount of the liability. If we imagine the case of a 
government taking advantage of a demand for paper circulation 
by paying its creditors in notes convertible on demand, with the 
purpose of gradually accumulating in its treasury cash equal to the 
amount of notes in use, we should have a case strongly resembling 
the operation undertaken by the Venetian Senate in establishing 
the Bancogiro as one of its public offices. 

These circumstances afford some explanation for the tradition 
that the Bank of Venice was originally a public debt ; 2 and, taking 
into account further the fact that the Banco del Giro superseded 
the Banco di Rialto so effectually that the date of its own creation 
was, as it were, submerged, and that the transfer of deposits, the 

1 This statement is so important as showing the object of the reserve that it is worth 
while to present its text : — 

" Et perche una delle principali et piu necessarie consideration! di questo Banco 
per il publico, e per il privato interesse, e che li sia fatto assignamento tale, che non solo 
possano li particolari haver prontamente qualche summa de denaro, che e loro bisognasse 
cavare alia giornata, ma che sempre, paresse a questo Consiglio id venir alia estinzione di 
detto Banco, vi siano pronti li Capitali sufficienti per dar ad ogn' uno il suo giusto credito. 

" Perd s' intendi fermamente preso, ecc." Lattes, p. 189. 

2 This explanation is suggested by Rota, " Storia delle Banche," p. 114. 



THE BANK OF VENICE 1 59 

giro practised by both, was their best known characteristic, and 
had also been the practice of private bankers for an unknown period, 
we can see the possible growth of the legend which finally assigned 
to the Bank of Venice a life of about six centuries. 

The history of the Banco del Giro from its establishment in 
1619 has never been written. 1 Materials for it exist in abundance 
in Ike Venetian archives ; but, although they have been drawn 
from by Ferrara and Rezasco, nobody has thought it worth while 
to follow the bank carefully through its vicissitudes, and it is not 
certain that the gain from doing so would be great. For the 
present purpose, at any rate, it is enough to say that the republic 
did not find it easy to carry on the business of the bank in the 
regular course contemplated by the law. The engagement to fill 
up the reserve of the bank by monthly payments was, in effect, an 
engagement to pay off a public debt at that rate from revenue ; and, 
this being found difficult, fresh creations of liability put off the 
time for completing the payments. In 1630 the closing of the bank 
was determined upon, 2 and the raising of the money needed for this 
purpose was provided for ; but some changes in affairs — the 
effect probably of the breaking out of the war in Candia in 163 1 
— caused this plan to be abandoned. The bank kept on with 
varying success and credit ; and in 1650 money was again raised to 
cover in part the public debt and thus to place the establishment 
on a firmer basis. During all this earlier part of its history, how- 
ever, the bank probably suffered as much from disorderly manage- 
ment as from the inability of the government to clear off its debt. 
Notwithstanding the elaborate regulations prescribed by law to 
insure against official malfeasance, frequent irregularities and 
frauds appear to have occurred ; and several revisions of the regu- 
lations had to be made to check the negligence of responsible 
officers. In 1662 a great fraud committed by a bookkeeper was 
discovered ; 3 and it is to this culmination of evil in the manage- 
ment of tha bank that the revision of its regulations in 1663 was 
due. 4 The new code then published is filled with such minute 

1 See p :66, below. 

2 See Trevisan's " Informazione," as cited above, p. 297. 

8 Trevisan says " un enorme intacco." " Informazione," cited above, p. 298. 
* The Ordini e Regole of 1663 begin with this recital : " Vedendosi da gl' Infedeli 
Ministri neglette, e contravenuto a tante sapientissime Regole dalla prudenza dell' 



\ 



160 ESSAYS 

provisions against neglect and misconduct, and contains such fre- 
quent references to abuses and fraud, as to give the impression of 
a constant struggle with unfaithful or dishonest servants. 

The eighteenth century saw the cash office of the bank closed 
and specie payments suspended, from 171 7 to 1739, as a consequence 
of the wars in which the declining republic was engaged for many 
years. The credit of the bank fell during this period, but recovered 
when the cash office was reopened by order of the Senate in 1739 ; 1 
and thenceforward the commercial writers treat the bank as a solid 
and important establishment until the breaking out of the wars of 
the French Revolution. The embarrassment of the republic by 
the year 1797 had led to such drafts on the cash of the bank that, 
with a deposit of nearly 1,500,000 ducats, the reserve was reduced 
to a trifle over 522,000 ducats. 2 The bank, however, survived the 
occupation of Venice by the French ; and when, under the treaty 
of Campo Formio in October, 1797, the Venetian republic was ex- 
tinguished and the city was given to Austria, an effort was made 
to restore the credit of the establishment by creating a redemption 
fund, fondo di Amortizazione, supported by a stamp duty on bills 
of exchange, bills of lading, and policies of marine insurance, 3 and 
later by other revenues. The deficit was for a time reduced ; but 
the Austrian administration found its own wants pressing and the 
coffers of the bank tempting, and in 1804 the deficit had again 
risen, according to Rezasco, to nearly 1,280,000 ducats. The Fiscal 
deputato al Bancogiro reported at some length in January, 1805, 
upon some reforms for the benefit of the redemption fund. But 
the defeat of the Austrians at Austerlitz and the treaty of Presburg 
in December, 1805, brought Venice under the French domination ; 
and in July, 1806, Napoleon issued his decree for the liquidation 
of the debts of the Bancogiro, allowing for one-fourth of the amount 
of scrip receivable for purchases of public property, and registering 
the other three-fourths in the public debt called the Monte Napo- 

Eccellentiss. Senato fondate per la buona direttione del Banco del Giro, anzi con fraude 
dannabile dilapidati i Capitali del Banco stesso con tanto universale gravissimo pre- 
giudicio." In Marperger, " Beschreibung der Banquen," p. 190. 

1 For the decree, see Rota, " Storia delle Banche," p. 1 16. 

2 Rezasco, p. 83. 

3 Proclamation by Count de Walis, imperial commandant, October, 1798, in the 
archives of the Frari : MS. copy, received from Mr. F. R. Grist, late United States vice- 
consul at Venice. 



THE BANK OF VENICE l6l 

leone. 1 This stroke, by a heavy hand, closed a remarkable chapter 
in economic history. 

Without seeking to trace more minutely the changes in the 
varying credit of the bank and their causes, it is important to ob- 
serve the effect produced by the suspensions of payment, which, 
as has been seen, occurred several times, beginning with perhaps 
more than one such period during the war of Candia 2 between 
163 1 and 1669. In order to do this, however, we must briefly 
consider the nature of the currency used by the bank. The uni- 
form statement of the writers who at any period had occasion to 
notice its currency is, that the ducat in which the bank kept its 
accounts was twenty per cent higher in value than the actual 
ducats in circulation, or, in other words, that the bank used a money 
of account which bore this premium when rated in current money. 
This, for example, is the statement made by Turbolo so early as 
1629 ; 3 by Malynes in 1656; by the author of the " Discorso," 
who wrote near 1 760 ; and by Ricard and other commercial writers 
near the close of the last century. The ducat banco represented 
no coin, and as little did it represent, as some have supposed, a 
superior value caused by the high credit of the bank. Whatever 
the reason for the particular ratio selected, the establishment of a 
nominal bank ducat superior to the real ducat was an adminis- 
trative provision probably made when the bank was opened or 
shortly after. 4 It was, in fact, simply the establishment of an im- 
aginary denomination, for use in accounting. The language of the 
" Discorso " as to what really took place when the bank was still in 

1 For copies of the report of the Fiscal Deputy in 1805 and of Napoleon's decree 
of liquidation in 1806, the writer is also indebted to Mr. F. R. Grist. 

2 It is probably to a suspension during this war that Matthew Lewis refers, in his 
pamphlet "A Large Model of a Bank" (London, 1678), when he says that in the late 
Turkish wars the Senate was forced to expend all the specie : " now there is no money 
at all, neither is any money in specie ever paid out ; but . . . the Fund is a meer im- 
aginary thing." 

- 3 Turbolo, " Discorsi e Relazione sulle Monete del Regno di Napoli," in Custodi's 
Collection, vol. i., p. 200. 

4 Turbolo's statement, made in 1629, is that the difference of twenty per cent ex- 
isted da tnolto tempo. Trevisan, writing near the close of the same century and after 
examination of the documents, says expressly, after describing the foundation of the 
bank, " In questo momento si stabili anche una moneta propria per il medesimo banco," 
etc. " Informazione," p. 296. Malynes, "Lex Mercatoria" (edition of 1656), describes 
(p. 257) many cases of what he calls imaginary money. Among them is the Venetian 
ducat banco % but he does not remark upon it as in any way unusual. 

M 



1 62 ESSAYS 

full operation leaves no doubt on the point. If, says the writer, a 
person carries 1200 real ducats, ducati effetivi, to the bank, he re- 
ceives credit for 1000 ducats banco ; and if, having credit for 1000 
ducats banco, he draws it out, 1200 real ducats are paid to him. 1 
The so-called constant agio of twenty per cent was then simply the 
result of using two denominations to express the same real value, 
— as if the Bank of England were to keep its accounts in guineas, 
which are worth five per cent more than sovereigns, but are repre- 
sented by no actual coin, sovereigns being used the while as current 
money. The agio presupposed freedom of deposit and freedom 
of withdrawal; and, such freedom being maintained, the agio 
would hardly rise and could not fall. It would not rise so long 
as credit in bank could be obtained by depositing coin, and it could 
not fall so long as 1200 real ducats could be drawn for every 1000 
ducats banco. If there were a scarcity of bankable coin, the ducat 
banco, being required for certain payments, might conceivably be 
" cornered " ; but this could not affect its relation to coin, and it 
could not depreciate except in the case of suspension. 

The 1200 real ducats with which the depositor procured his 
credit for 1000 ducats banco were, however, ducats of lawful 
weight : whereas the coin in actual use in Venice, as in the other 
commercial cities of that age, consisted, to a great extent, of pieces 
below the standard, either from wear or from illegal practices, 
constituting a currency often much depreciated. The coin of full 
weight then bore a variable premium when exchanged for that in 
ordinary circulation ; and thus we have what was called the sur- 
agio, which had to be taken into account in reducing bank money 
to everyday cash. 2 The agio represented the difference between 
the denominations used by the bank and by the public in dealing 
with standard money, and the sur-agio measured the depreciation of 
circulating coin below the legal standard. 

These were the conditions under which the Bancogiro carried 
on its operations when receiving, transferring, and paying out, ac- 
cording to the scheme of its charter. The execution of this scheme 

1 Quarterly Journal of Economics, April, 1892, Appendix, p. xviii. 

2 Thus Kruse, " Allgemeiner Contorist" (Hamburg, 1753), p. 174, says , "Die Valuts 
at entweder Banco, oder Corrente, oder Piccoli," and then goes on to explain that Banco 
bears an agio of twenty per cent in Corrente, and Corrente an agio of twenty-nine per 
cent in Piccoli, defining the three valute substantially as above. 



THE BANK OF VENICE 163 

was several times interrupted, however, as we have seen, by suspen- 
sion of payment. Besides one or two earlier suspensions of un- 
certain date, 1 the bank stopped its payments in 1691 and again in 
171 7, both times under the stress of war. In these cases, the 
Senate, closing the cashier's office, appears to have used for the 
public service the cash on deposit, and on the second occasion, if 
not on the first, according to the writer of the " Discorso," the 
supplies for the fleet were paid for by credits in bank, which, he 
adds, " is the same thing in substance as giving out notes instead 
of money." The statements made as to the effect of these suspen- 
sions on the credit of the bank are contradictory ; but they may 
be reconciled upon a little reflection as to the connection between 
depreciation and over-issue. 

It is plain that a currency which for important purposes is a 
legal tender would not lose its ease of circulation by becoming in- 
convertible, and might even be kept at par with specie, if its supply 
were strictly limited to the demand for the special purposes referred 
to, as, for example, in this case, the settlements for exchange. In 
short, the good credit sometimes enjoyed by the bank after suspend- 
ing payment, which excited the wonder of foreign observers, like 
the English pamphleteer, Dr. Matthew Lewis, is the same phe- 
nomenon which has been observed in other cases, where incon- 
vertibility has not been made the excuse for over-issue. The notes 
of the Bank of England did not seriously depreciate for ten years 
after the suspension of 1797; the notes of the suspended banks of 
New York and New England did not fall much below specie after 
the suspension of 1857 ; an d the Bank of France from 1870 to 1878 
generally kept its inconvertible notes close to par. Considering 
the difficulty found even by the present generation in comprehend- 
ing such cases, it is not surprising that in the seventeenth century 
the Bank of Venice should have seemed to have in use an " imagi- 
nary money," independent of any cash basis, and, nevertheless, of 
higher credit than even coin itself. But the Venetian Senate was 
not always cautious as to the use of credits in bank, but, as in the 
case referred to above, yielded to the temptation or necessity of 
over-issue. The inevitable result then followed, — the ducat banco 

1 In Matthew Lewis's "Proposals to King and Parliament" (London, 1677) there 
is some account of a suspension, apparently not very recent, given by him on the au- 
thority of Venetian merchants, as evidence that credit is better than cash. 



1 64 ESSAYS 

depreciated, notwithstanding its use in settlements for exchange 
and the supposed credit of the republic x The evil was of the 
simplest nature possible ; and the remedy was as simple. After 
the long suspension from 1717 2 to 1739 the Senate finally, as an 
expedient, " a togliere ogni alterazione alia partida del Banco," to 
cite the words of the act, 3 reopened the cash office, and, to insure 
its ability to continue its payments, devoted to this purpose 250,000 
ducats then at the command of the government. In other words, 
depreciation was ended by resuming payment and restoring the 
convertibility of the ducat banco. No fiat of the Senate had given 
the ducat banco an invariable value when the bank was not paying 
its debts, and no such fiat was needed when these debts, to use an 
emphatic phrase from our own legislation, were again " payable 
and paid on demand/' 

Such a case falls strictly into line then with what happened to 
the Venetian private bankers when they suspended and again re- 
sumed, and with what happens in the nineteenth century when 
any bank of issue or of deposit goes through the same changes. 
That any mystery should have grown up as to the amenability of 
the Bancogiro to the recognized laws of value, is perhaps due in 
part to the belief that no depreciation took place when the bank 
suspended, which was industriously and ignorantly spread by some 
foreign writers, as has been noticed above. In part, also, the 
mystery is due to the failure to comprehend the meaning of the 
agio, in which, however, the merchant of the last century found 
nothing wonderful, as is clear from the matter-of-fact treatment of 
the subject by the commercial writers. The meaning of the agio 
is confused no doubt by the occasional efforts of the law to limit it 
to the regular rate, and to prevent speculation at times when either 
the scarcity of standard coin or the suspension of business at the 

1 As to the fact of depreciation, Savary may be cited, " Parfait Negociant," i. 
464, where he remarks rather contemptuously that little harm was done, for those who 
lost confidence could easily find persons who would relieve them by purchasing their 
credits in bank at ten or fifteen per cent discount. Cantillon, " Essai," p. 412, appar- 
ently referring to the suspension of 1690 and using intelligence obtained from Venice, 
speaks of a depreciation of twenty per cent. Daru, " Histoire de Venise, iii. 135, 
says, " Les valeurs de banque continuerent de circuler sans defaveur." But Daru, 
although he catalogued the " Discorso," seems to have overlooked among other things 
its express affirmation that the bank credit fell twenty per cent in the Ottoman War, 
and that the condition of credit was critical. 

2 See p. 167, below. 3 See Rota, " Storia delle Banche, " p. 116. 



THE BANK OF VENICE 1 65 

cash office made it possible to " corner " the medium in which 
large commercial payments had to be made. Still, with the mind 
freed from the notion that credit can be worth more than cash 
otherwise than accidentally, — or, in other words, that a promise 
is worth more than the thing promised, — the agio falls into its 
natural place as the mark of a currency which is below the stand- 
ard fixed by law or usage, and the transactions of the Bancogiro 
are seen to exemplify and confirm principles now recognized as of 
everyday application. 

The proper limits of this paper do not permit a review of the 
daily operations of the Bancogiro, as described by the writer of the 
" Discorso." His account of the Depositary taking his place in 
full view of the Piazzetta, ringing his bell when the concourse of 
merchants on 'change shows that the time for banking has come, 
and setting his hour-glass to mark the beginning of the two stated 
hours, the viva voce dictation of transfers by depositors so that the 
clerks may make the entries in duplicate, the peremptory close of 
transactions at the sound of the bell and the drawing of the marella, 
the removal of the books to the grated chambers, the careful sepa- 
ration of the two sets of books and of clerks, so that no collusion 
may invalidate the comparison of the balances when finally drawn 
off in duplicate, the use of Roman numerals in some of the accounts 
rather than Arabic, — all this gives us the picture of a leisurely, 
punctilious, and traditional movement, well adapted perhaps for a 
city with declining commerce, but not for one in the hurry and 
bustle of full prosperity. The private bankers, more ready to 
adapt themselves to the needs of the community, had served their 
purpose, but had paid the penalty of inexperience in dealing with 
credit. The public bank had replaced them, had discarded a part 
of their functions, and had reduced the remainder for safety to an 
inflexible routine. In this form, however, the public bank had no 
longer the power to adapt itself to the needs of commerce in a 
rapidly changing world ; nor was it saved from loss of both cash 
and credit by the hand of the government. Even without the 
shock of the French Revolution, then, and without the final order 
for liquidation from Napoleon, it is not probable that its importance 
could have continued long. The Bancogiro, like the Bank of 
Amsterdam, could have found no place in the nineteenth century. 



I 



l66 ESSAYS 



Postscript 1 



In the article on the origin and nature of the Bank of Venice, 
the remark was made that the history of the Bancogiro from its 
establishment in 1619 has never been written; and it was added 
that, although much material exists, " nobody has thought it worth 
while to follow the bank carefully through its vicissitudes, and it is 
not certain that the gain from doing so would be great." The 
writer of the article regrets that by his failure to observe the mono- 
graph II Banco Giro di Venezia of Professor Soresina 2 he has 
done injustice to a valuable work and a meritorious writer. 

Professor Soresina, in preparation for his work, made a labo- 
rious examination of the material existing in the Marcian Library 
and in the Archives of the Frari, and appears to have thoroughly 
explored these sources. This investigation enabled him to make 
a careful review of a period of Venetian banking history which 
the present writer was obliged to dismiss in two pages, and to 
present a body of information as to the actual operations of the 
bank far more important than had ever before been made public. 
The course of legislation with respect to the bank is followed 
closely, some statements of account which have survived are pre- 
sented, and several documents of great interest are given in full. 
Among these are the offer made by Giovanni Vendramin, in 16 19, 
to supply the mint with a large amount of silver, which led to 
the establishment of the Bancogiro, and the text of the act which 
closed the Banco di Rialto in 1637. 

In several particulars the accurate information secured by 
Soresina corrects or explains statements previously current as to 
the affairs of the bank, and particularly with respect to its sus- 
pensions of payment. The period beginning with 1630, in which 
the bank was supposed to have suspended payment perhaps more 
than once, now appears to have witnessed a continuous suspension 
from 1630 to 1666, when the opening of the cash office put an end 
to the forced payment by transfer of bank credits. I*- was to this 
long suspension, then, that Matthew Lewis referred in his " Large 
Model of a Bank" in 1678 as the expenditure of all the cash in 
the bank "in the late Turkish wars." The effort in 1630 to take 

1 Quarterly Journal of Economics, January, 1893. 

2 Amadeo Soresina, " II Banco Giro di Venezia." Venice, 1889. 8vo, pp. 94. 



THE BANK OF VENICE 167 

measures a saldare ed estinguere il Banco appears to have con- 
templated, not the closing of the bank, but provision for extin- 
guishing its debt, which was then overwhelming. Of a suspension 
of the bank in 1691, mentioned by McLeod and others, Soresina 
gives no notice ; nor was any trace found by Signor Siboni in the 
documents at the Frari. 1 On the contrary, the cash office ap- 
pears to have remained open from 1666 to 171 3. 

The second long suspension then began, which ended with 
the second reopening of the office in 1739. The date of this failure, 
which had been incorrectly given by the present writer as 171 7, 
shows that the occurrences of which Cantillon received informa- 
tion (" Essai sur le Commerce," pp. 409-412) related to the second, 
and not to an earlier suspension ; and the measures which he 
mentions, without dates, as taken for the purpose of raising the 
credit of the bank, are apparently the steps taken for that pur- 
pose in 1 71 8, and described by Soresina (page 41). 

1 Giornale degli Economisti, September, 1892, p. 292, note. 



: 



ACCOUNTS OF THE FIRST BANK OF THE UNITED 

STATES 1 

The first Bank of the United States was obliged by its charter 
to report its condition to the Treasury Department as often as 
required, not exceeding once a week. It is well known that Mr. 
J. J. Knox, when Comptroller of the Currency, found that the 
existing records do not show that any formal reports were ever 
made. Two balanced statements were given to Congress by Mr. 
Gallatin, one in March, 1809, and the other in January, 181 1 ; and 
it has sometimes been assumed that these were the only reports 
ever made. 

That Mr. Knox's search in the Treasury Department brought 
no reports to light proves but little. The Treasury Department, 
it will be recollected, was burned when Washington was occupied 
by the British forces in August, 18 14; and it was burned again in 
March, 1833. The official statements made to Congress as to the 
documents and books lost and saved on these two occasions raise 
a presumption that any such reports, if in existence at the time of 
either conflagration, would not have been among the papers saved, 
the effort being made in both cases to save primarily what was 
needed for the current public service. The failure, therefore, to 
discover at the present time a set of papers, which even in 18 14 
had only an historical value, cannot be regarded, under the cir- 
cumstances, as having any weight. 

There are, however, many pieces of evidence scattered in 
the public documents tending to show that the bank was required 
by the Treasury Department to make frequent report of its con- 
dition, and that it did so in obedience to the law. 

The most complete account which we have is that which was 
sent to the House in January, 181 1, as above stated, and is given 
in " State Papers on Finance," Vol. II., page 468. This state- 
ment, made in much detail, is said by Mr. Gallatin in the letter 

1 Quarterly Journal of Economics, July, 1892. 
168 



ACCOUNTS OF THE FIRST BANK OF THE UNITED STATES 1 69 

communicating it to be " extracted from the latest returns received 
at this office from the bank." It was then one of a series. The 
return of 1809 above referred to, printed ibid., page 352, although 
a balanced account, is given in round numbers and has been stig- 
matized as an account "trumped up"; but Mr. Gallatin's letter 
transmitting it states expressly that the amount of the principal 
items " is taken on a medium," — that is, it is an averaged account, 
and no more " trumped up " than the averaged accounts now pub- 
lished weekly by the clearing-house. Mr. Gallatin's language 
shows that he preferred to give an averaged account, because it 
better represented the ordinary condition of the bank than the 
actual figures at the date of his report ; and, as the question before 
Congress related to a renewal of the charter, it was the ordinary 
condition of the bank which Congress most needed to understand. 
For the present purpose, however, the important point is that, in 
making a statement "taken on a medium," Mr. Gallatin probably 
had before him the various detailed statements of which this 
medium is the average. In one other instance we have direct 
evidence that an account of the bank was in possession of the 
government. In Gallatin's " Writings," Vol. I., page 59, Jeffer- 
son writes to Gallatin, November 11, 1801, giving a comparative 
table of certain items in the accounts of the Bank of the United 
States and of banks in several of the principal cities. If we take 
the items relating to the Bank of the United States and arrange 
them in their proper form, we find that they make up an account 
as follows : — 

Liabilities Resources 

Capital, $10,000,000 Discounts, .... $12,150,000 

Undivided Profits, . . 40,000 Six per cent and ad- 
Notes, 5,200,000 vance to government, 5,460,000 

Deposits, Due from banks, . . 1,450,000 

Government, . . . 3,560,000 Specie, 5,000,000 

Individual, . . . 5,240,000 



$ 24,040,000 $24,060,000 

It is sufficiently evident that Jefferson in this case had a balanced 
account of the bank which he simplified by throwing off the thou- 
sands, this process causing the discrepancy which appears in the 
totals of debit and credit. 



1 



170 ESSAYS 

Besides these references to other statements than those now 
known to exist, there are numerous significant allusions to be 
found in Gallatin's correspondence and in the debates in Congress 
upon the proposed renewal of the charter. Thus, in Gallatin's 
"Writings," Vol. I., page 80, we have Gallatin, in June, 1802, 
comparing the condition of the Bank of Pennsylvania with that of 
the Bank of the United States. To cite only one passage from 
the debates, we find Mr. Finley, on April 30, 18 10, saying in the 
course of his speech that " the Secretary of the Treasury has, for 
the time being, had authority by law to inspect the directors of the 
bank, and did do it, and obtained weekly returns of its situation." 
In Gallatin's communication to the House, January 10, 181 1, in 
" State Papers on Finance," Vol. II., page 460, there are significant 
references to " the returns made to the Treasury," and " the offi- 
cial statements transmitted in conformity with . . . the charter," 
and the like. And in Mr. Gallatin's well-known " Considerations 
on the Currency and Banking System," published in 183 1, we find 
him making a general statement as to the proportion which the 
loans made and stocks owned by the bank bore to its capital for 
the whole of its existence, — a statement which a man of his cau- 
tion would not have made without full documentary evidence. In 
short, there is ample reason to believe that, when the stockholders 
declared in their petition for a renewal of the charter, in April, 
1808, "that the confidence of the government [was] founded upon 
a constant knowledge of the interior management and condition 
of the bank," they told the truth. Indeed, it is inconceivable that 
they should have made this statement to a Congress in which their 
opponents had the majority, if there had been any possibility of a 
denial. 

That the accounts given to the Treasury Department were not 
made public, as they would be in our own day, is not surprising, 
when we see the different view then commonly held as to giving 
publicity to such statements. For example, in Jefferson's letter of 
November, 1801, referred to above, it will be observed that he 
suggests that statements from the state banks should be general- 
ized, and the total of the yearly average should be presented to 
Congress. " It would give us," he says, "the benefit of their and 
of the public observations, and betray no secret as to any particu- 
lar bank." And it will be recollected that at that period the 



ACCOUNTS OF THE FIRST BANK OF THE UNITED STATES 171 

Bank of England, on which the Bank of the United States was 
closely modelled, made no publication of its accounts, and that it 
was not until 1834 that even a quarterly statement was required to 
be made. In the earlier part of the century the public could learn 
nothing as to the condition of the bank, except the selected facts 
cautiously given out in Parliamentary investigations. Mr. Tooke, 
in his evidence before the committee of 1832, in " Parliamentary 
Documents," 1831-1832, Vol. VI., described the accounts thus given 
of the cash held by the bank at some critical periods as " mysti- 
cal " ; and some important witnesses, even in 1832, maintained that 
to give the bank accounts to the public, especially to state the 
amount of bullion held, might be a mischievous practice. It is not 
surprising, then, that the accounts of the first Bank of the United 
States down to 181 1 were regarded as confidential. That under 
the seal of confidence they were regularly made, from an early 
period and probably for the whole of the bank's existence, seems 
to be more than probable. 



DEPOSITS AS CURRENCY 1 

In the discussions upon the various phases of the currency- 
question during the last twenty years, the popular dread of con- 
traction and its consequences has seldom been appealed to in vain. 
Congress has been a good index of public opinion in this respect, 
and in Congress there has steadily been an element which seemed 
to have grasped the idea of a connection between contraction and 
falling prices, as the one and sufficient key to the practical ques- 
tions which were to be settled. To this fact were due the weak 
legislation of 1874, to go back no farther, and the necessity in 
1875 of so framing the Resumption Act as to leave its meaning 
open to opposite constructions and its operation uncertain — a 
necessity which Mr. Sherman, in carrying the bill through the 
Senate, did not seek to disguise. Nothing else than a deep con- 
viction in Congress that " the people would not stand contraction " 
can explain the fact that the act of May 31, 1878, "to forbid the 
further retirement of legal tender notes," was carried through the 
House of Representatives under a suspension of the rules and 
without a word of discussion, the decision of the question as to the 
meaning of resumption and the perpetuity of the legal tender 
issues being treated as of less consequence than the appointment 
of a doorkeeper. And, in the discussions of the national banking 
system, the same dread of contraction, or of a supposed popular 
fear of contraction, constantly appears, and shapes the expedients 
offered by the opponents, and sometimes by the friends, of the 
present system. 

This, however, brings forward in a convenient form the ques- 
tion, What is the currency of which the contraction is thus 
dreaded ? In the resumption discussions, it was assumed that, 
apart from specie, the legal tender and bank-notes make up the 
currency ; the amount of each kind outstanding was anxiously 
computed, and the increase or diminution of the aggregate 

1 Quarterly Journal of Economics, July, 1 887. 
172 



DEPOSITS AS CURRENCY 1 73 

noted as a decisive fact. And so, too, in later discussions, the 
sinking of bank-note issues, while the legal tenders are constant 
in amount, is often treated as a portent, the lesson of which is 
either the remodelling and renewing of the system or the substitu- 
tion of government paper for bank-notes, as may be preferred. 
Without attempting a formal statement of the constituents of the 
currency, the writer wishes to recall the fact that there is a kind 
of bank circulation more important than bank-notes, and that the 
theorems of currency cannot be correctly applied if this is ignored. 

The ease with which we ignore deposits as a part of the cur- 
rency seems the more remarkable, when we consider that few men 
in business fail to recognize the true meaning of this form of bank 
liability ; that it is a circulating medium in as true a sense and in 
the same sense as the bank-note, and that, like the bank-note, it is 
created by the bank and for the same purposes. McLeod's remark, 
that " every bank is a bank of issue," may seem a hard saying: 
still, every man of affairs would be found applying it in practice 
and recognizing the essential truth contained in it in a tolerably 
distinct manner ; and probably one reason for the moderate interest 
which practical men are apt to take in discussions of currency is, 
that such discussions so commonly deal with what experience shows 
to be only a part of the essential elements of any actual question. 

It is interesting to observe that, in the early efforts to deal with 
the subject of credit currency in this country, the greatest of the 
financiers on each side recognized plainly and constantly the 
true significance of bank deposits. Hamilton at the start made 
a statement which could hardly be improved upon : — 

Every loan which a bank makes is, in its first shape, a credit given to the 
borrower in its books, the amount of which it stands ready to pay, either in its 
own notes or in gold or silver, at his option. But, in a great number of cases, no 
actual payment is made in either. The borrower frequently, by a check or order, 
transfers his credit to some other person, to whom he has a payment to make ; 
who, in his turn, is as often content with a similar credit, because he is satisfied 
that he can, whenever he pleases, either convert it into cash or pass it to some 
other hand, as an equivalent for it. And in this manner the credit keeps circu- 
lating, performing, in every stage, the office of money, till it is extinguished by a 
discount with some person who has a payment to make to the bank to an equal 
or greater amount. 1 

1 "Report on a National Bank" (1790), iii. 128, of Hamilton's "Works" (Lodge's 
■edition). 



\ 



174 ESSAYS 

Gallatin was quite as explicit as Hamilton, stating his proposi- 
tion more than once, 1 with a wide interval of time, substantially 
as follows: — 

The bank-notes and the deposits rest precisely on the same basis. . . . We 
can in no respect whatever perceive the slightest difference between the two ; and 
we cannot, therefore, but consider the aggregate amount of credits payable on 
demand, standing on the books of the several banks, as being part of the cur- 
rency of the United States. This, it appears to us, embraces not only bank- 
notes, but all demands upon banks payable at sight, and including their drafts 
and acceptances. 

These citations, embodying a principle which perhaps stands 
in little need of formal exposition, show plainly enough how far 
much of our discussion and even of our legislation has drifted 
from the position taken at the outset. The current of our legisla- 
tion for years has not only treated note issue as the subject of 
chief interest, but has often proceeded on the theory that nothing 
else need be considered ; and the debate, in Congress and out, has 
run chiefly upon the greenback and the bank-note. This absorp- 
tion of all interest by the inferior constituent of our credit currency 
is easily explained. Besides the apparent ease of legislating upon 
note issues and the obvious difficulty of legislation upon deposits, 
the notes were, in the earlier decades of our history, the more 
important of the two. The comparative sparseness of population 
and the imperfect development of the banking habit, in a new 
and more slowly advancing country and in a less advanced age 
than tjie present, created an early preference for the currency 
which passes from hand to hand, and discouraged the use of that 
which implies a resort to the bank. Even in the abnormal years 
1809 and 181 1, when all business was stagnant as the result of the 
embargo and subsequent non-intercourse, the note circulation of 
the Bank of the United States was little below its debt to indi- 
vidual depositors, as shown by the only statements of that institu- 
tion ever given to Congress ; and, in the accounts even of the best 
developed state banks of that date, the notes have clearly the first 
place. The figures collected by Gallatin for 1820 and 1829 show 
the same preponderance of note circulation. The returns collected 
by the Treasury for many years, under the resolution of July, 1832, 

1 See his report to the Senate (March 3, 1809), in " State Papers, Finance," ii. 351 ; 
and his essay on the " Currency and Banking System," " Writings," iii. 267, 268. 



DEPOSITS AS CURRENCY 1 75 

show that it was not until 1855 that the deposits of the banks 
taken in the aggregate rose above their circulation. Even under 
such special circumstances as those of Massachusetts, the notes 
continued to be the more important element until 1858, with the 
exception of an irregular period from 1806 to 1823, and two or 
three scattered years of exceptional conditions. 1 

And not only were the notes practically the more important 
during these years, but events riveted the attention of the public 
upon them. The suspension of specie payments at the close of the 
second war with Great Britain, the history of the second Bank of 
the United States and the struggle for its recharter, and the hard- 
money movement which finally led to the independent treasury 
system, all tended to keep the notes in the foreground, and to give 
the impression that banking is synonymous with note issue, as the 
old acts of Parliament treated it. The long-continued suspension 
of 1 86 1 and the later controversies, turning primarily on the ques- 
tions raised by the greenbacks, but involving the bank-notes, have 
easily and naturally followed the same line. 

Our experience resembles that of other countries in this respect 
Even in England, where modern deposit banking had its earliest 
development and has reached its highest point, and where for more 
than forty years legislation has set the note circulation apart in 
such a way as to bring into the strongest possible relief the cur- 
rency function of deposits, there is the same trouble in realizing a 
patent fact, and, if we may trust Bagehot, from the same cause : — 

Probably up to 1830 in England, or thereabouts, the main profit of banks was 
derived from the circulation ; and for many years after that the deposits were 
treated as very minor matters, and the whole of so-called banking discussion 
turned on questions of circulation. We are still living in the debris of that con- 
troversy ; for, as I have so often said, people can hardly think of the structure of 
Lombard Street except with reference to the paper currency and to the act of 
1844, which regulates it now. 2 

Even a writer usually so much in sympathy with the practical 
movement of the times as Jevons, in his " Money and the Mecha- 
nism of Exchange," shows a singular inability to free himself from 
the old notion that money and bank-notes are nearly all that need 

1 See Gallatin, ''Writings," iii. 291, 296; and Report of the Comptroller of the 
Currency, 1876, pp. 38-46, and Appendix. 

2 " Lombard Street," p. 85. 



176 ESSAYS 

be dealt with in treating of currency. The real importance, how- 
ever, of the neglected element is shown by the published returns. 
At the close of 1886 the total note issue of the United Kingdom, 
including that of the Banks of England and Ireland and of all 
private banks and joint-stock banks, was slightly over ^£50,000, ooo. 1 
At nearly the same date the deposit accounts of the joint-stock 
banks of the kingdom, nearly all shown by published accounts, 
amounted to ^446,800,000, and the " other deposits " of the Bank 
of England to .£29,000,000 : so that, with allowance for private 
banks and others for which estimates only can be had, it is prob- 
able that there was an aggregate of £560,000,000 to £570,ooo,ooo. 2 
The chief expansible element of the currency, on which the growth 
of English domestic trade and the adjustment of a constantly 
swelling mass of transactions have mainly depended, has been this 
vast system of transferable credits, which still waits for its due 
share of attention in economic discussion. 

England is still cumbered by the debris of the old controversies 
over note issue, but the continental countries are still in the heat of 
controversy itself. The question as to the close monopoly held by 
the Bank of France and the monopoly held by groups of banks in 
Germany and Italy, together with the imperfect development of 
what we have called the banking habit, has curiously narrowed 
all current discussion as to " banks of issue," and has made ques- 
tions of banking seem to turn upon the kind of evidence by which 
the existence of similar debts may happen to be certified. The 
whole continent is, in fact, in much the same stage as England and 
the United States before 1830 as regards practical methods. The 
"account current " holds its place in the statements of the conti- 
nental banks, but the place is not an important one. The check has 
helped to introduce the clearing-house ; but progress is slow, and 
the scale of operations — while it shows a gain of convenience for 
the banks concerned — does not indicate the use of the machinery 
as a vital part of the circulating system of a country. Continental 
writers, therefore, have naturally done even less than English 
toward setting the deposit and check system in its true light. 3 

1 Journal of Statistical Society, March, 1887, pp. 251, 252. 

2 See Economist, May 21, 1887. 

3 Courtois, who recognizes with tolerable distinctness the similarity between the 
issue of notes and the opening of a deposit account, makes the naive remark : " On a 



DEPOSITS AS CURRENCY 177 

In making the inquiry as to the share taken by deposits in 
the active circulation of the United States, we happily have a good 
source of information in the reports of the Comptroller of the 
Currency. These reports give, with precision, five times a year 
the circulation and deposits of all the national banks ; and from 
these statements a sufficiently fair average for any year or any six 
months may be struck. The tax formerly levied by the United 
States upon deposits also brought into the Treasury returns from 
all banks and trust companies doing business under the laws of 
the several States and from private bankers, which may fairly be 
taken as accurate down to November, 1882, when the repeal of 
the tax put an end to the series. Since that date, moreover, the 
successive comptrollers have obtained from official sources such 
information as could be had respecting state banks and trust com- 
panies ; and this, although imperfect and not given for uniform 
dates, is an approximation to the actual movement down to the 
present time. Of the reported deposits of trust companies only a 
small proportion represent the trusts held by these companies ; but 
by far the greater part belongs to the banking business, which is 
their chief function. And, although the action of parts of their 
deposit accounts may be sluggish from their methods of dealing 
with customers, — as is also true in some degree of any bank, 
national or state, — it seems not unfair on the whole to let these 
deposits stand on the same footing as those of the ordinary banks, 
especially in view of the probability that the figures are within 
rather than beyond the truth. Unfortunately, there are no longer 
the means of determining the amount of the deposits with private 
banks and bankers; it was probably not overstated before 1883, 
and it can only be said that the amount, if it could be known, would 
probably show that the increase observed down to that date has 
continued since. Taking then, for comparison, the six months' 
averages which the Comptroller's reports give for the banks other 



cree un concurrent au billet de banque, il est vrai, mais un concurrent bien faible ; quel 
stimulant a deposer des especes en compte courant a la Banque, si on ne vous sert aucun 
interSt ? " . " Histoire des Banques en France," p. 241. Wagner, in his article in Schon- 
berg's " Handbuch " on " Credit und Bankwesen," has some important remarks on the 
origin of " book-credit deposits " and their use as a real substitute for notes. See §§ 54- 
57. Knies, in " Geld und Credit," fails to reach any clear conception of the function 
of deposits. 



i;8 



ESSAYS 



than national, the figures from these sources may be grouped as 
shown in the following table : — 

[In dollars, 000,000 omitted.] 



Average for 6 months ending 
November 30, 1875 
May 31, 1876 
May 31, 1877 . 

May 31, 1878 
May 31, 1879 
May 31, 1880 
May 31, 1881 
May 31, 1882 
November 30, 1882 
For year 1883 . . 

1884 .... 

1885 .... 

1886 .... 
Amount on March 3, 



1887 



Notes 



Nat. 
Banks 



318 
308 

293 

301 

304 
321 

309 
321 
312 

311 

292 
271 

242 
186 



Deposits 



Nat. 
Banks 



675 
617 
640 

6ll 
614 

799 
989 
1,047 
1,095 
1,054 
1,010 
1,071 
1,146 
1,225 



State 
Banks 



Trust 
Cos. 



487 
480 
471 



23O 
257 

319 

386 
452 
490 



335 
325 

344 

343 



165 
189 
188 
214 



Priv. 
Bankers 



184 
I40 

183 

242 
296 
289 



Aggre- 
gate 



I,l62 
1,097 
1,111 

1,025 
I,OII 

i>3°i 
1,617 

i ? 795 
1,874 
[1554] 
[1524] 
[1603] 
[1703] 



There can be little doubt, then, that in 1886 the aggregate 
deposits of banks and bankers in the United States, savings banks 
being of course excluded, were on the average above two thousand 
millions ; and there may be said to be a high degree of probability 
that at the present time the aggregate stands at nearly double the 
amount which was returned for 1875. The increase has not been 
without interruption. The total has fallen in periods of depres- 
sion, and it has risen with regaining confidence. Indeed, the 
changes in the business situation of the country, acting through 
the demands of persons dealing with the banks, of necessity 
leave at this point a permanent record of their passage. But 
the fact which it is chiefly desired to emphasize here is the com- 
plete elasticity of this section of our currency. It adapts itself to 
the demand of the moment without visible effort and either by 
expansion or contraction, as the case may be; and it does this 
quite irrespective of legislative purpose or guidance. From the 



DEPOSITS AS CURRENCY 1 79 

figures, indeed, the conclusion is irresistible that, if for any reason 
the creation of deposit currency through the agency of the national 
banks is hindered or limited, it will make its growth by means of 
state banks ; and, if not by these, then by a system of private 
banking, which no legislation can touch, until the government 
shall assume the power of declaring whether A may owe B or not. 
The growth of this kind of credit may be guided and it may be 
made more or less sound according to the wisdom of legislation. 
The stability of the standard to which its value relates is wholly 
within legislative control, and the continuity of the test of its sol- 
vency by reference to that standard is within the scope of legisla- 
tive influence. But, whether the legislation be good or bad, here 
is the adjustable part of our system of credit currency, and the 
part of it which will continue to adjust itself to the scale of the 
transactions to which current business naturally gives rise. 

In view of the extraordinary growth of this kind of credit 
currency, the mere question of the amount of national bank-notes 
in circulation sinks into insignificance, and with it the question 
whether their place must be made good by other descriptions of 
paper, as, for example, by greenbacks. There is a real question 
as to the convenience of using coin, in place of a part of the paper 
which the community uses in its small transactions ; there is a 
question as to the wisdom of depriving a great system of banks of 
the ability to supply whichever form of credit may be required by 
the public ; and there is a grave question as to having any larger 
part of our credit currency, or any part of it, subject to control 
as regards its amount, by any legislative body whatever. But as 
regards the mere question of contraction, still sometimes brought 
forward with respect to the paper currency, the grounds for it 
have ceased to exist. For, besides the fact that since resumption 
specie has come in and must continue to come, through an ever 
open door, to make good any deficiency of circulating medium, the 
growth of deposits has covered many times over all loss in the 
amount of paper circulation. In fact, as soon as specie payments 
were firmly established and the value of credit currency was set- 
tled, by its assured conversion at pleasure into a solid medium, con- 
traction ceased to be any proper object of dread. Indeed, we may 
go farther, and say that if the United States government were to 
pay off every legal tender note, and if every bank-note were to 



180 ESSAYS 

be withdrawn, these changes would produce no real contraction of 
the currency. With specie thus brought into common use for 
smaller and everyday transactions, we should, it is true, have a 
currency far less convenient for its minor uses, and we should 
no doubt see the use of the deposit and check system thus carried 
prematurely into classes of transactions and into sections of coun- 
try where the note now meets a popular demand ; but, as regards 
the mass of exchanges from which the business condition of the 
country at any given time takes its tone, we should find them car- 
ried on as now, by a creation of bank credits on whatever scale 
the needs of the time might require. 

Upon this point sufficient evidence is presented by the opera- 
tions of the national banks since the resumption of specie pay- 
ment. Of these operations, the great results are clearly shown 
in the diagram issued with the comptroller's report for 1886. 
Inspection of this diagram shows an enormous expansion of the 
general scale of transactions by the banks since 1879. This ex- 
pansion has come only in a moderate degree from the applica- 
tion of new banking capital ; it has come in spite of the sinking 
of the line which describes the changes in circulation, and chiefly 
from the sharp rise of the line of deposits during the flush period 
from April, 1879, to December, 1881, and again from the fall of 
1884 to the present time. The elastic power of the deposit cur- 
rency, and the certainty with which it fills the void left by the 
disappearance of paper, could not be illustrated better than by the 
soaring of the red line as the black one sinks, upon Mr. Tren- 
holm's chart. 

The legitimate inference from these considerations is not, how- 
ever, that the disappearance of the bank-note, or the substitution 
of government paper for it, is to be viewed with indifference. 
The business of a country in which the banking habit is firmly 
seated will, it is true, find a medium of exchange, and in the 
amount needed ; but it is of great consequence that the medium 
used should be made up of the kinds most convenient for the use 
of the community, and divided between those kinds in the pro- 
portions most convenient. This question of proportion is one 
which no combination of counsellors, public or private, can deter- 
mine. No legislature and no conclave of bankers can say that 



DEPOSITS AS CURRENCY l8l 

the people of the United States require any given amount of notes 
for the management of their exchanges. The amount which is 
sufficient this year may, and almost certainly will, be either insuf- 
ficient or in excess the next ; and it is partly from a sense of the 
absolute inability of any human foresight to deal with this prob- 
lem, that we owe the multitude of schemes proposed in years past 
"to adapt the amount of the [paper] currency to the needs of 
the country." 1 

Left to itself, the country settles this problem of proportion 
in a natural way, by the demand which each individual using a 
credit currency of any kind will make for notes or for a deposit 
account, as his special conditions may require. But, in order that 
this natural process should go on easily and without inconvenience 
to the community, it is requisite that the banks or bankers with 
whom individuals deal when obtaining loans or receiving payments 
should have the ability to respond to demand in either form ; in 
other words, that the creditor of the bank or banker should be 
able to receive the evidence of his claim in the one form, if he 
expects to use it in large operations or in a closely settled com- 
munity, or in the other, if in small operations or where hand-to- 
hand dealings are the rule, and that the lender should find his 
profit equally in responding to either demand. It is only by 
being allowed to take one or the other form, as occasion requires, 
that a given mass of bank credit can perform its functions with 
the maximum of public advantage. There may be sound reasons 
of a different order for not giving the power of issue in both forms 
to every company or individual carrying on the business of bank- 
ing; in other words, the ideal of a perfectly free system of 
banking is no doubt beyond reach ; but that, for the greatest 
advantage of the public, the issue of notes by banks should be 
widely enough diffused to present in every considerable district 
which uses banking facilities at all the easy choice between the 
two methods of using credit, seems to be beyond dispute. This 
choice is given only when the power of issue is substantially in 

1 It is true that there is a party who believe that the issue of notes for the country 
should be fixed and " have no elastic power." See Mr. Buckner's speech in the House 
on the extension of bank charters, April 17, 1882. And a Secretary of the Treasury once 
committed himself to the astonishing proposition, that the issue of bank-notes ought to 
be fixed in amount and the issue of legal tenders adjustable by the Treasury, according 
to its conception of the needs of the time. See Finance Report, 1872, p. xx. 






1 82 ESSAYS 

the same hands which control the loans and the business of bank- 
ing generally. It is, in fact, one of the great services rendered 
by the national banking system that, for a most critical quarter 
century, it carried note issue and deposit banking side by side 
throughout the greater part of the country, under the manage- 
ment of a class of remarkably sound institutions, giving to the 
community many of the benefits of free banking with the mini- 
mum of its risks. As a substitute for this system, the issue of 
notes by the Treasury is as little to the purpose as the striking of 
coins by the mint; nor is there any machinery by which the oper- 
ations of the Treasury can be made to perform the desired office. 
Happily, those operations are quite distinct from the commercial 
movement of the country, and are unsuited by their nature for 
any closer connection with it, even if such connection were expe- 
dient. 

To the firm establishment of the right of note issue as a prac- 
tical alternative given to the banking system of the country, it is 
doubtful whether any serious opposition would have arisen had 
there not been an impression that in some way this right is the 
opportunity, either for an exorbitant profit or, at any rate, for a 
profit which should be reaped by the government. As regards 
the amount of the profit coming from circulation, no real answer 
has ever been made to the computations by which the late Comp- 
troller repeatedly demonstrated in his reports the trifling margin 
of gain left by the use of credit in this form. Whatever may 
have been the profits of banks from this source fifteen years ago, 
with the rates of interest then prevailing, there is no doubt as to 
the comparative unimportance to-day of using their credit in a 
form which requires as a preliminary the investment of capital 
at the rate of two and one-half per cent. Indeed, the figures show 
that, by jealously maintaining the primitive forms of the national 
system under altered conditions, note circulation has long been 
systematically discouraged and its essential advantages for the 
public sacrificed. 

To every practical demonstration of the narrow margin of 
profit, however, the common reply is, after all, a more or less open 
appeal to the theory of a supposed double source of profit under 
a secured issue — a theory which has had a strong hold on the 
public, and has not always been met with complete perception of 



DEPOSITS AS CURRENCY 183 

its hollowness, even by the friends of the national system. For 
the present purpose it is enough to point out that the source of 
profit for any bank is the investments in securities or loans which 
it can hold, by the use of its capital, together with its credit in any 
form ; that its profit is not increased by pledging any part of the 
investment to secure any class of liabilities ; and that, therefore, 
the sources of profit open to national banks issuing nctes are of 
precisely the same order as those enjoyed by state banks and 
private bankers. The national bank has the great advantage of 
a choice between methods of using its credit; but, however its 
choice is made, its investment is necessarily measured by its capi- 
tal plus its credit, which is also the measure for its non-issuing 
neighbors. The confinement of the national banks therefore to 
the use of credit in one form, instead of giving them an alternative 
between two, would not cut off a double profit now enjoyed, but 
would merely require that the credit by which a part of their 
profit is earned should be evidenced by book account, and not by 
demand note, or vice versa. In short, the profits of the banks are 
increased by the right of issue only so far as that right makes it 
possible to extend the credit of the banks, and so to increase their 
holding of investments, beyond the point which they could reach 
by the use of the deposit system alone. But the swift extension of 
deposits already pointed out makes it extremely doubtful whether 
the extinction of the note issues would now have any serious ef- 
fect on the total amount of bank credit used or any practical result 
other than a certain inconvenience to the public. Barring the 
effect on some of the smaller interior banks, the probability is 
that the national banks in the aggregate would, even without the 
right of issuing notes, continue to expand their business and to 
earn such dividends as the current rate of interest would have 
allowed in any case. This is the natural inference from the fact, 
already noted, that hitherto the displacement of their notes has 
been far more than made good by the increase of deposit accounts. 
That the government makes a saving by the issue of its own 
notes, so far as these are the substitute for an interest-bearing debt, 
and that it might make a still larger saving by occupying the whole 
field of paper circulation, is an independent consideration. It is, 
however, plainly a consideration of very little practical value, when 
we take into account the ease with which ordinary sources of in- 



1 84 ESSAYS 

come enable the government to reduce its debt as well as meet its 
expenditure, and the fact that the disposition of a surplus revenue 
has been so far an insoluble problem. Obviously, the government 
of the United States can afford to settle the currency of the coun- 
try upon whatever basis is found to be for the convenience and ad- 
vantage of the public, without being diverted from this aim by any 
necessity for securing a certain number of millions. It is conceiv- 
able that other functions now left to private enterprise might at a 
pinch be assumed by the Treasury and made to produce a revenue ; 
but few persons would pretend that there is any fiscal reason which 
could be of weight in favor of such an assumption, if it appears 
that the general interest is in any way promoted by leaving the 
service to individuals. Economy at any cost is not our rule in 
dealing with other subjects, and there is no reason why it should 
be a controlling consideration in the regulation of any part of our 
currency. 

Assuming, then, that the profits of note circulation are but the 
ordinary profits of bank credit, such as will be earned under what- 
ever system may finally prevail, and assuming also that the govern- 
ment can afford to forego the use of its credit in the form of notes, 
and to allow the banks to continue and extend the use of theirs, the 
question as to our banking system resolves itself into the inquiry, 
whether it is for the interest of the public to keep deposit bank- 
ing as far as possible under the national system, or to allow it to 
drift more and more into the possession of state banks or into pri- 
vate hands. The optional use of the right of circulation being re- 
moved, not much is required, it would seem, to turn the scale as 
between a national charter, on the one hand, with its numerous 
safeguards and its strict public supervision, and a state charter, on 
the other, with its frequent absence of all limitations — to say 
nothing of the complete license of private banking. The fact of 
the existence of nine hundred state banks and of thirty-six hundred 
private banking-houses is evidence on this point. " It is doubtful," 
says Mr. Trenholm, " whether the banks would find sufficient in- 
ducement to remain in the system without enjoying some privileges 
as to the issue of currency." 

The doubt whether there is power under the Constitution to 
charter banks except in connection with an issue of notes may 
probably be dismissed ; but not so the doubt whether banks would 



DEPOSITS AS CURRENCY 1 85 

care to hold national charters if the power of note-issue were with- 
drawn. For here the comparative soundness and safety of the 
whole of our credit currency come into question, and we have to 
ask, What is the safest system for its more important as well as its 
minor element ? If there is reason for demanding that the cur- 
rency used in the small transactions of the community shall be 
secure, there is also reason for requiring that the greater currency 
used in large transactions shall be secure. That complete super- 
vision of the latter is impossible from the nature of the case does 
not affect the result : it is still for the advantage of all that as 
large a proportion as possible of the sources of our real currency 
should be kept under that organization which practically is found 
to insure the best oversight and the safest management. There is 
no doubt as to which organization that is. The conclusion seems, 
then, to be irresistible that, if the national system can retain its 
control over twelve hundred millions of deposits, as the figures now 
stand, and perhaps extend its control over a part of the eight or 
ten hundred millions held elsewhere, the community would buy 
this result cheaply by allowing the issue of such proportion of 
bank-notes as this mass of business would imply. The risk of 
inflation from overissue would not be a serious element in the ac- 
count. It would not be appreciably greater than at present ; for, 
after all, inflation is as easy and, under favoring conditions, occurs 
as surely with a system of pure deposit as with a note system, as 
the operations of our own banks in any period of excitement may 
testify. And, in any case, the security against the consequences 
of inflation is not to be found in the limitation or extinction of 
notes, but in specie redemption for all liabilities, and in the encour- 
agement given to sound banking by steady oversight and pub- 
licity. Such security, it may be presumed, we shall continue to 
have under the national system in as great a measure as at 
present. 

The kernel of the banking question for the United States, then, 
as it seems to the writer, is to be found in the future of the deposit 
system. If this is settled upon the best plan practicable, the sub- 
stance of the question will have been disposed of; and, for the 
purpose of such settlement, the continuance or perhaps it should 
be said the revival, of the right of issue might well be allowed as a 
makeweight. It is not within the scope of this paper to discuss 



1 86 ESSAYS 

the various propositions for meeting the practical difficulty arising 
from the extinction of the national debt. It may be said of these 
propositions in general, however, that they are expedients for pro- 
longing the existence of the national bank-note issue for such time 
as any part of the national debt may remain unpaid, postponing 
the main question, which must present itself with the disappear- 
ance of the debt. In this part of the discussion, as in others, the 
impression created by the success with which the present secured 
circulation has worked is so great, that it is hard to bear in mind 
that, after all, the kind of security held is not of the essence of the 
system. Evidently, the fundamental point is that the notes shall 
be secured by a preferred claim upon some sufficient portion of the 
property of the issuing bank. This portion of property, now re- 
quired to consist of United States bonds, may, however, equally 
well consist of other securities of assured value. It is, indeed, en- 
tirely conceivable, so far as the principle of the system is concerned, 
that here, as in Germany, a solid circulation might be issued, of 
which the basis should be those general securities and commercial 
obligations of short date, which are found sufficient to guard the 
credit of a bank with its own customers and the public. In short, 
if we once recognize the fact that the particular set of details 
which have marked our system so far are obsolescent, the market 
is not without securities and the world is not without examples, on 
which a substituted system of circulation could be safely estab- 
lished. 

It would no doubt be difficult to arrange a plan for securing 
notes as simple and perfect in its operation as that which the 
existence of a great public debt has given us the enjoyment of 
since the Civil War ; but the actual difference to the public, if a new 
basis of security were to be sought, would probably not be appre- 
ciable. We are apt to underrate the extent to which the liabili- 
ties of the national banks are protected by the general safeguards 
of the system, as distinguished from the specific pledge of securities. 
The deposit accounts of these banks, however, are secured only by 
the strength of the motives which usually prompt directors to 
prefer good investments to bad. And it appears that, with an 
average of such deposits of over one thousand millions for the last 
five years, the loss to depositors has been less than one-fifth of 
one per cent, not of the movement, but of the average hold- 



DEPOSITS AS CURRENCY 187 

ing. 1 A loss, then, which is hardly greater than the mere unnoticed 
abrasion of some large classes of coin circulation, measures the 
risk in practice of what would be called an entirely uncovered 
liability, under a well-organized system like the present. It is to 
the reduction of a fractional loss like this upon the note circulation 
that the machinery of any system of pledged securities is directed. 
To find a working plan which can be used with practical safety 
within such limits cannot be a hard task for legislative ingenuity. 

1 Down to September, 1886, the proved claims against insolvent national banks 
since 1863 amounted to #44,236,247, on which #22,508,900 had been paid. The last 
five years of the period were the worst, including the heavy failures of the Mechanics' 
National Bank of Newark, the Pacific of Boston, the Marine of New York, and the 
Exchange of Norfolk, which amounted to more than #12,500,000. For the five years 
the proved liabilities of insolvent banks, including these four, were #17,047,245, on which 
#7,343,000 has been paid. The average loss of the five worst years, then, has been less 
than #2,000,000, or less than one-fifth of one per cent of the deposits. 



THE BANK-NOTE QUESTION 1 

The question as to the continued existence of bank-notes as a 
part of the currency of the United States has recently entered 
upon a new phase. For several years past the majority of our 
people and of their political representatives have observed with 
great equanimity the gradual disappearance of national-bank notes, 
and the approach to the point where the trifling profits upon circu- 
lation and the extinction of the national bonded debt would leave 
no paper in use except the notes and coin certificates of the United 
States. This surrender of the whole field to government paper, 
the result of circumstances, but not designed by law, has been 
defended, moreover, on the ground that the national Treasury 
ought to receive whatever profits or convenience may be secured 
from the issue of credit as a substitute for money, and that the 
right of issue granted to corporations of any class is an unreason- 
able addition to their many privileges. We now have the propo- 
sition repeatedly brought forward in Congress, discussed and 
supported in the public press, and embodied in the platform of one 
of the great political parties, to repeal the tax of ten per cent on 
the notes of banks and bankers carrying on business under the 
laws of the several states, and thus to admit to the field of circula- 
tion the issues of a vast number and variety of local institutions, 
which have been excluded therefrom by the practice of the last 
twenty-five years. In short, the present form of the bank-note 
question appears to be, not whether the whole right of issue shall 
lapse into the hands of the national government, but whether that 
right may not advantageously be extended to everybody whose 
exercise of it is admitted by the varying policy of forty-four local 
legislatures. 2 

1 Quarterly Journal of Economics, October, 1892. 

2 Bills for abolishing the tax on notes of state banks, or for equalizing taxation on 
the notes of national banks and of state banks, have been introduced : — 

188 



THE BANK-NOTE QUESTION 



189 



A sudden change of ground like this, involving a proposed 
revolution in our system of paper currency and in much besides, 
may betoken a decisive and durable alteration in the lines on which 
the bank-note question is to be discussed hereafter ; or it may only 
be one more instance of the facility with which large numbers of 
our people are ready for a brief space to seize upon the last new 
idea, — especially in matters of finance. That the idea is now to 
be found in a political platform, we are warranted in saying, proves 
nothing, except that in the judgment of some persons it has a 
present hold upon some important classes or sections, and is likely 
to retain that hold until November. But, whether durable or tran- 
sient, the change of ground is too important to be neglected. In 
either case, it probably has its origin in real wants felt keenly in 
some parts of the country, though perhaps misunderstood. And 
in either case it is interesting to inquire whether the remedy pro- 
posed is safe and appropriate to those wants. 

The legislation under which banks are now organized under 
state authority is, in some cases, the same that was in force prior 
to the establishment of the national system, in some cases has been 
revised, and in others is of quite recent origin. In some cases, — 
as, for instance, in some of the New England states and in New 
York, — it is extremely elaborate ; and in others, as in Missouri, 
Virginia, and parts of the Northwest, it enters into comparatively 
few details. In some cases, the grant of powers is wide enough to 
cover all banking functions, including issue, and in some it will be 



1875. 


H.R., by Mr. Riddle, Tenn. 


1889. 


H.R. 


, by Mr. Henderson, N. Car, 


1876. 


H.R., by Mr. Atkins, Tenn. 


1889. 


H.R. 


, by Mr. Dibble, S. Car. 


1876. 


H.R., by Mr. Roberts, Md. 


1889. 


H.R. 


, by Mr. Richardson, Tenn. 


1876. 


H.R., by Mr. Riddle, Tenn. 


1891. 


Sen., 


by Mr. George, Miss. 


1879. 


H.R., by Mr. Vance, N. Car. 


1891. 


H.R. 


, by Mr. Bland, Mo. 


1879. 


H.R., by Mr. Buckner, Mo. 


1891. 


H.R. 


, by Mr. Wheeler, Ala. 


1879. 


H.R., by Mr. Davis, N. Car. 


1892. 


Sen., 


by Mr. George, Miss. 


1882. 


H.R., by Mr. Gibson, Ga. 


1892. 


H.R. 


, by Mr. Richardson, Tenn. 


1882. 


H.R., by Mr. Hutchins, N.Y. 


1892. 


H.R. 


, by Mr. Bland, Mo. 


1884. 


H.R., by Mr. Dibble, S. Car. 


1892. 


H.R. 


, by Mr. McMillin, Tenn. 


1 886. 


H.R., by Mr. Chandler, Ga. 


1892. 


H.R. 


, by Mr. Cox, Tenn. 


1886. 


H.R., by Mr. Dibble, S. Car. 


1892. 


H.R. 


, by Mr. Breckinridge, Ark. 


1886. 


H.R., by Mr. Bennett, N. Car. 


1892. 


H.R. 


, by Mr. Harter, Ohio. 


1888. 


H.R., by Mr. Dibble, S. Car. 


1892. 


H.R. 


, by Mr. Harter, Ohio. 


1888. 


H.R., by Mr. Chandler, Ga. 


1892. 


H.R. 


, by Mr. Harter, Ohio. 


1889. 


Sen., by Mr. Vance, N. Car. 


1892. 


Sen., 


by Mr. Vance, N. Car. 


1889. 


H.R., by Mr. Chandler, Ga. 


1892. 


Sen., 


by Mr. Harris, Tenn. 



IQO ESSAYS 

found that in the revision of statutes in the last generation the 
issue of notes has been prohibited. The provisions for regulating 
the operations of banks vary, from cases like that of Massachusetts, 
which maintains some restrictions so severe as to prevent the 
organization of any banks at all under state law, to such cases as 
that of New York, where a thoroughly organized state system is 
able to meet the national system at times on something like equal 
terms. Some of the states have their banking departments fully 
organized for the purpose of supervision : others have no organiza- 
tion beyond the requirement of returns to be made to the auditor 
or some other officer of the state. The provisions for returns and 
for publicity of operations are generally imperfect, and far below 
the standard of the national system, many states being content 
with an annual statement only. 

The distribution of state banks under these circumstances is 
extremely irregular. In some states none exist : in others they 
are strong, and their number is rapidly increasing. But, if we take 
the statements collected and published annually by the Comptroller 
of the Currency, we shall find that their great strength is in the 
group of Northwestern states, in two or three states of the centre, 
and in a few of the South Atlantic and Gulf States. 1 It will also 
appear, that the capital of the state banks is not proportional 
to their numbers, but shows a much lower average per bank than 
the capital under the national banking system. This is due in 
part to the general though not universal preference of large city 
banks for organization under the national system, and also in part 

1 Of the 2572 state banks covered by the Report of the Comptroller of the Currency 
for 1 89 1, two-thirds may be grouped as follows : — 

Wisconsin 91 Virginia 93 

Iowa 122 N. Carolina 29 

Minnesota 93 S. Carolina 19 

Missouri 401 Georgia 34 

Kansas 134 Kentucky 151 

Nebraska 356 Tennessee ....... 64 

N. Dakota 51 Mississippi . 54 

S. Dakota 65 

1313 444 

New York has 176, Pennsylvania 84, California 144, and the group Ohio, Indiana, 
Illinois, and Michigan have 196. The remaining 22 states have 215 in all. This 
account does not include loan and trust companies. 



THE BANK-NOTE QUESTION 



191 



to the great number of banks with small capital organized under 
state laws. The minimum of capital allowed by the national 
banking system being $50,000, the state systems in many cases set 
the minimum at $25,000, as in New York and Iowa; in others as 
low as $10,000, as in Missouri; and in some cases even as low as 
$5000, as in Nebraska, Kansas, and the Dakotas. For the organi- 
zation of banks with feeble capital, therefore, whether this is the 
result of inability to provide more or of limited employment for 
capital in the particular locality, the state laws often give an 
opportunity not allowed by the national system. That the demand 
for the establishment of small banks is increasing, especially in the 
West and South, is clear from the recent legislation of the states, 
and from the marked increase in the number of banks organized 
under state law. 1 

1 The following table, made up from the reports of the Comptroller of the Currency, 
is intended to show the recent growth in number and capital of state banks and national 
banks in two important groups of states. The returns given for state banks, being 
partly official and partly unofficial, leave much to be desired, and in the year 1 884-1 885 
only supply the figures for three States. It should be said, also, that, in the case of 
Kansas, the figures for the two earlier years probably include some savings-banks, the 
law of the state not drawing the line distinctly at that time. 

[Capital given in millions and tenths. .] 





State Banks 


National Banks 


1884-1885 


1887-1888 


1890-1891 


1884 


-1885 


1 887-1 888 


1 890-1 891 


No. 


Cap. 


No. 


Cap. 


No. 


Cap. 


No. 


Cap. 


No. 


Cap. 


No. 


Cap. 


"Wisconsin 


— 


— 


64 


#3.8 


91 


#5- 2 


5° 


#44 


57 


#5-2 


69 


#6.8 


Iowa . . . 


— 


— 


74 


4- 


122 


6.4 


122 


IO.I 


129 


10.2 


141 


12.1 


Minnesota . 


34 


#3-9 


61 


5-7 


93 


8.1 


50 


"•3 


57 


13.7 


59 


14. 1 


Missouri . . 


187 


13. 


238 


134 


401 


16.7 


40 


6-3 


49 


""•5 


80 


23.9 


Kansas . . 


54 


2.1 


177 


6.6 


134 


5.8 


60 


4- 


146 


11.2 


*5 2 


13-4 


Nebraska . . 


— 


— 


69 


2.2 


356 


9- 


63 


4.8 


104 


8.4 


136 


12.8 


N. Dakota . "i 
S. Dakota . J 










51 


.7 










29 


2. 






23 


.6 


65 


1.8 


35 


2.1 


62 


3-1 


39 


2.5 


Virginia . , 


— 


— 


64 


3-5 


93 


5.8 


24 


3-5 


25 


3-8 


33 


43 


N. Carolina . 


— 


— 


16 


1.1 


29 


1.8 


r 5 


2.4 


19 


2.5 


20 


2-5 


Tennessee 


— 


— 


28 


2.3 


64 


5- 


33 


5- 


40 


7-5 


52 


10. 


Mississippi . 


— 


— 


14 


1.1 


54 


3-3 


5 


•4 


12 


1.1 


12 


1.1 



192 ESSAYS 

So far as the legislation of the several states still retains its 
provisions for the issue of notes, there is the same variety which 
existed before the Civil War. The issue of notes by banks incor- 
porated under general acts, the issue by banks under special char- 
ters, the issue of notes by private bankers under state regulation, 
may all be found provided for in one state or another. In some 
cases provisions have been retained which contemplate the deposit 
of adequate security, and in others no specific security is called for. 
In the states which in 1861 suffered the most from the ccllapse of 
free banking systems based upon inferior securities, the sections 
relating to the issue of notes will be found generally, and perhaps 
in all cases, to have dropped out of the statutes in some later re- 
vision; but, so far as issue is still recognized by the states as a 
theoretically possible function of their banks, there is the same 
variety of method and even of purpose in the restrictions applied 
to it. In the event, therefore, of a general revival of state legis- 
lation upon this subject, there is nothing in such provisions as now 
exist, nor is there anything in the character of the other state laws 
respecting banks, to lead us to look for any greater uniformity of 
system than formerly. Opinions may differ as to the possible 
effect in all parts of the country of a more enlightened public 
opinion in enforcing the demand for the protection of note issues 
by sound legislation, but there can hardly be a difference as to the 
probability of great variety in the methods of protection to be 
adopted, and in their comparative efficacy. 

It is clear that the present demand for rejection of what had 
by common consent been regarded as the most valuable character- 
istic of our national bank currency — its complete unity — cannot 
be made by any considerable part of our people except under the 
spur of some keenly felt demand. The sections where the pres- 
ent movement probably finds its greatest strength are those in 
which heretofore there has often been a strong tendency to favor 
the exclusive use of that simplest of all currencies, the greenback. 
The change of preference from one issue to countless issues, from 
notes having universal credit to notes limited in their use to a 
state or perhaps a county, has had some strong reason in the 
economic condition of the sections where opinion has thus veered. 
The sections concerned are agricultural ; they are depressed by the 
low prices of their great products ; they depend upon others for 



THE BANK-NOTE QUESTION 193 

no small part of their manufactured supplies ; and their people 
are in debt. In a vigorous statement of the condition of the South 
a few months ago, Hon. H. A. Herbert, of Alabama, traced the 
origin of this state of things to the system of federal taxation. 
The South, he maintained, has worked with incredible industry 
for fifteen years ; but its gains have been steadily drained away by 
taxation, to be expended in other parts of the country, and in the 
end the South finds itself as poor as ever. Without discussing the 
question here raised as to federal taxes, and only noting that, if 
we accept Mr. Herbert's opinion as to their effect, the logical con- 
clusion would be that the remedy should be sought in a reform of 
taxation and expenditure, and not in a revolution of the currency, 
we remark here the same complaints as to insufficient means and 
pressure of debt which have come from the South during the 
greater part of its existence. The condition of much of the West 
and Northwest has been described by Hon. M. D. Harter, of 
Ohio, in very nearly the same terms. 1 Those sections, as a whole, 
also feel the present stress of low prices, are large buyers and 
large debtors. Aside from the question as to federal taxation, 
they, too, are pressed, as they always have been pressed, by the 
need of more and more capital for the development of their abun- 
dant resources and the employment and support of swiftly growing 
populations. 

Both in the South and in the West evils of this description have 
been experimented upon for years, without disclosing any cure 
except that which comes with the gradual accumulation of wealth 
in a mature community. Every form of currency has been tried 
by turns, — specie, paper, national, local, — with the sole result of 
showing that the economic malaise might easily be aggravated, 
but could not be cured. It has its origin in the fact that any coun- 
try which is being rapidly taken up, and is therefore essentially 
new, whatever the age of its political fabric, is apt to need for pres- 
ent use more capital than it has had time or opportunity to acquire. 
As a whole, it is in debt ; and, as individuals, its citizens are bor- 
rowers. This pressure to borrow is plainly not to be satisfied by 
dilution of the currency. Although the present need of an indi- 
vidual debtor may be satisfied by mere paper, the relation of the 

1 For the speeches of Messrs. Herbert and Harter, made in Boston, June 13, 1892, 
see the Boston Herald of the following day. 
o 



194 ESSAYS 

community, as a whole, to other sections and to the outside world 
in general, requires something more solid, — something as solid as 
the general standard. And, as now seems to be generally rec- 
ognized, the pressure is not to be satisfied by an ampler currency 
for the country at large, however sound. Aside from the tempo- 
rary effects of any sudden change in the general currency, alter- 
ation in its amount does not alter the relation which the sections 
under rapid development bear to the rest. They are still sure to 
require large supplies of capital, in one form or another, beyond 
their own ability to supply, and sure therefore to appear in the 
market as borrowers. 

But, as has already been suggested, the individual's share in 
this general pressure is felt by him as a need for that which will 
pay debts, a need for currency, and so as a need for loans from 
banks or bankers in any form which will provide him with the 
means of present payment. The rapid multiplication of banks 
under state legislation is the natural expression of this necessity, 
on the part of the individual, of finding some means for making 
his hope in the future available as a present supply ; and the oppor- 
tunity is found under the state systems, because under them there 
is no requirement that any part of the capital of a bank should be 
invested at a rate so low as three per cent, and because, in other 
respects, the state systems are often freer from regulation and 
from disagreeable restrictions. But the tendency for an increase 
of banks under state legislation is only the recurrence in a new 
form of a phenomenon which has often appeared in the history of 
the farming states. Public opinion on the subject of bank credit 
has undergone many singular changes in those states. Some of 
them have at times encouraged the wildest schemes of paper cur- 
rency, have at times rushed in despair to the opposite extreme of 
discouraging even sound banking, and again have relapsed into 
the old toleration of whatever can be passed from hand to hand. 
But at every stage the real effort has been the same, to supply 
themselves with capital beyond their possible accumulations, — the 
necessity under which any quickly developing and enterprising 
community must needs find itself. It is a real and even inevitable 
want therefore, and not a mere craze for expansion, which seeks 
satisfaction at the present time and stimulates the call for a prac- 
tical restoration of the right of issue to state banks. 



THE BANK-NOTE QUESTION 1 95 

Indeed, it may be added here that the increase of banking in 
the West and South has not hitherto been excessive, nor does it 
generally tend to excess now. Omitting from consideration the 
private bankers, as to whom there is unfortunately no longer any 
means of attaining even approximate information, the increase of 
national and of state banks together in these sections, in the last 
twenty years, has not more than kept pace with their general 
growth, and has fallen behind the growth of some of their leading 
interests. The natural spread of banking operations has appar- 
ently been hampered and held in check ; and we should probably 
be safe in finding the obstacles to be the failure of Congress to 
encourage organization under the national system, which for some 
years has visibly checked the increase of national banks, and 
some reluctance of banking capital to organize under the liberal 
but A still inferior state systems. 

But there is an important distribution of banking facilities in 
progress, in addition to the simple expansion of their amount. 
Reference has already been made to the establishment, under 
state systems, of banks with capitals much below the minimum 
allowed by the national banking law. No doubt many of the 
banks thus established are below the minimum of safety. With 
their trifling resources, it is impossible that they should command 
for their service such experience and capacity as their operations, 
although on a small scale, really require in the interest of the com- 
munity. And yet the increase in the number of such small banks, 
hardly to be distinguished from the smaller class of private bankers, 
comes from an obvious tendency to carry banking facilities farther 
and farther from the great centres and to open the way for their 
more general use by the community at large. In short, there is 
not only a movement of increase, but a movement of diffusion 
going on, which is probably the result, not merely of the general 
pressure of debt in certain sections, already spoken of, but of a 
healthy desire to use more freely and widely than has hitherto 
been possible in sparsely settled communities the modern methods 
and agencies of commerce. The state systems afford an opening 
for this movement, and have therefore an importance in the busi- 
ness organization of the United States at this moment not always 
recognized in the more densely populated and wealthier parts of 
the country. With the quickened movement of commerce pro- 



196 ESSAYS 

duced by the railway, the telegraph, and the telephone, an eco- 
nomic need for the wider distribution of the machinery of exchange 
is developing, which the smaller banks under the state systems 
satisfy, — not perhaps in the best manner, but still in an important 
degree. When a Western state provides, as Nebraska does by its 
act of 1889, that banks with a capital of only $5000 may be estab- 
lished in towns having less than one thousand inhabitants, we must 
recognize that for that community, under its conditions, the complete 
diffusion of banking is felt to be a necessity. In this respect, the 
sparsely settled states are attemping to secure, by the multiplica- 
tion of independent banks, the same advantages which in England 
and Scotland have been obtained through the multiplication of 
branches by a limited number of banks. 1 

These considerations undoubtedly show that the state banking 
systems, in the present condition of the country, have an impor- 
tant sphere to fill ; and they raise the question, moreover, whether 
the national banking system might not be adapted by judicious 
amendment to meet wants which it cannot now supply. Leaving 
aside altogether the conditions on which notes are issued, and 
regarding the national banks merely as banks of discount and 
deposit, it would seem that this might easily be done. The smaller 
tanks, especially, would be put on far more equal terms if they 
were relieved from the present useless obligation of a relatively 
heavy investment in United States bonds. Moreover, the greatest 
possible diffusion of banking facilities, under an admirably guarded 
system, might be secured if the establishment of branches were 
encouraged and facilitated by law. That, in the present state of 
opinion, the branches of a central bank would have to contend 
with some local jealousies is probable ; but any real improvement 
in commerce or finance is tolerably sure to make good its footing. 
It is obvious, also, that, if the multiplication of branches were once 
fairly recognized again in the United States as a natural method, 
as it has been in the past, it would be as available for central 
banks under the state systems as for national banks. For both 

1 The ten great Scotch banks have not far from eight hundred branches in all, 
carrying their operations into every village. A similar practice in England and Wales 
gives about two thousand six hundred banks and agencies outside of the metropolis. 
Both in Scotland and in England there is a sharp competition over the whole field, so 
that even insignificant towns are apt to have more than one banker. 



THE BANK-NOTE QUESTION 197 

alike it would have the convenience of making it unnecessary to 
provide a full board of directors for every establishment, large or 
small, — a necessity which is often embarrassing in small places, 
— since a local manager under the direction and supervision of a 
central board could often perform the duties for which a local 
board now has to be made up. For both alike it would tend to 
diffuse business risks over somewhat larger areas than at present, 
with a gain analogous to that which such diffusion brings in 
insurance ; and for both it would be possible to apply banking 
capital at a given moment according to the unequal and variable 
needs of the different parts of any section covered by a given insti- 
tution and its agencies. 

But, besides a demand for the extension and diffusion of bank- 
ing in the sections referred to above, there is also a pressure, felt 
more keenly by them, but also observed elsewhere, for greater 
elasticity in the paper circulation of the country. In the United 
States — as in other countries having great annual movements of 
agricultural products — there are tides in the demand for tangible 
currency for actual use. Increase or diminution of the volume of 
general exchanges in urban communities is readily enough adjusted 
by variation in the amount of the more subtle medium known as 
bank deposits; but the marketing of crops in many states by 
farmers remote from banks, and little accustomed to transactions 
through them, means a temporary increase in the use of money or 
its substitutes. No doubt the extension and general diffusion of 
banking will finally minimize this increase, as it does in Great 
Britain, where the annual tide of tangible currency is moderate in 
its amount, although clearly visible in its flow ; and probably the 
smaller banks in the Northwest do much to meet this necessity 
for an expansible medium. At present, however, the want is 
serious, notwithstanding the heavy shipments of currency annu- 
ally made in the harvest months from the financial centres. With 
this regularly recurring demand for an elastic medium, the 
United States have for years been content with a singularly rigid 
system of paper currency, approaching year by year closer and 
closer to the condition of absolute inflexibility. The trifling gain 
made by the government from the issue of treasury notes has 
been treated as a complete offset to the vastly greater loss caused 
to the people at large, by their inability to use credit currency at 



198 ESSAYS 

the times and in the forms which our immense domestic commerce 
requires. Any reaction from this narrow conception of the public 
interest as something measured by the footing of a treasury 
account is a hopeful sign ; and it is probably to the long-felt need 
of some elastic quality in our currency beyond that offered by the 
export and import of metal, that much of the existing desire to 
find some terms on which state bank-notes can be issued is due. 
That notes issued by banks in response to a commercial demand 
for loans, and redeemable at sight in specie, are in general the 
most convenient form of elastic currency, and the most quickly 
responsive to the needs of the community, is recognized. That 
such notes are the form of currency best adapted to meet the 
tidal demand referred to above seems to be clear. But to make 
their issue safe, to avoid the needless rigors of the national 
banking system and not to lose its palpable advantages, is the 
problem. 

Of the solutions offered for this problem, looking to the re- 
newal of issues by state banks, two now seem to invite special 
attention : first, the proposition to simply repeal the ten per cent 
tax which has excluded state bank issues from the field since 1866 ; 
and, second, the proposition to allow notes to be secured by the 
deposit of a very wide range of securities, and then to extend 
the right of issue, upon terms not settled, to all banks, state or 
national. 

The naked proposition to repeal the ten per cent tax must be 
treated as, in fact, a proposition to return to the state of things 
existing before the war. It is vaguely said, indeed, that such a 
return is now impossible ; that no state would consent to the issue 
within its borders of unsound notes ; that it is an insult to the intel- 
ligence of the state legislatures to suppose that any of them would 
be less scrupulous than Congress in providing for the absolute 
security of every dollar authorized by it. But all this confident 
assurance is unsafe ground for legislation. The paper currency of 
the country is too important to be left for its regulation to our 
faith in human nature alone ; and though we may hope, or even 
believe, that the past will never return, it is well to be admonished 
by experience. Trust as we may in the universal desire of the 
state legislatures to keep on the solid basis of hard money, the 
repeal of the tax would indisputably open the door for evils which 






THE BANK-NOTE QUESTION 199 

were rife only a generation ago, and were no worse than those 
threatened within that period by popular crazes over large sections 
of the country. That the loss, in case of bad or mistaken local 
legislation, would be local, as is sometimes urged, is not to be taken 
for granted. On the contrary, with the present close commercial 
network covering the whole country, it may be fairly assumed that 
injury to any state by reason of a vicious local currency would 
mean injury to others also, and that in this respect, as in others, 
all are concerned in the welfare of each. 

At its best, therefore, the simple repeal of the ten per cent tax 
means the substitution of multifarious issues for the uniform cur- 
rency of the national banks. This follows as a necessity if note issue 
is left to local legislation, the agreement of legislatures upon a uni- 
form type of bank-note and upon uniform conditions of security 
being as impossible as their agreement upon any other matter of 
public concern, with the added difficulty that with respect to banking 
the real or supposed interests of the different local constituencies 
are notoriously at variance. Federal supervision of issues made 
under the authority of the states is sometimes hinted at, but can 
hardly be said to be distinctly proposed. Indeed, it would probably 
be far from satisfying the wishes of those who urge the simple 
repeal, their object being apparently to secure something far more 
free, flexible, and responsive to local opinion than any federal reg- 
ulation would allow. But, however this may be, the notion of a 
federal control of issues made by state corporations acting under 
the laws of the states presents legal and constitutional difficulties 
grave enough to authorize us to lay it aside until some distinct 
scheme for establishing such control is formulated. 

Looking forward, then, to a state of things in which each state 
should have its own system of issue again, with a possible uni- 
formity among the notes of all banks in any one state, we must 
contemplate the introduction of a bank circulation of unequal value 
in different parts of the Union. The uniform value which national 
bank-notes have in every state — the quality which was relied upon 
from the start as a chief recommendation of the system — comes 
from the universal knowledge that all essential conditions affecting 
one note are like those affecting any other, and from the uniformity 
of type which spares the receiver of bank-notes the trouble of even 
reading the name of the issuing bank. It may even be doubted 



200 ESSAYS 

whether the engagement for redemption at the Treasury gives them 
any considerable addition of credit, or has any practical effect in 
increasing the confidence with which they are taken at a distance 
from the place of issue. The fact that one note is substantially 
like another in all essentials and is receivable in payment by any 
national bank in any part of the Union, secures absolute uniformity 
of values and ease of flow in circulation. But this advantage is 
necessarily abandoned when the conditions of issue and the degree 
of ultimate security vary from state to state and become matter of 
inquiry whenever unfamiliar notes meet the eye, — possibly matter 
of special knowledge, attained by experts only. The rich experience 
of 1 850-1 860 showed that even notes of unimpeachable strength 
found some resistance to their circulation, and so lost something 
of their value, when far from home. The dealer in un-current 
money in those days was a well-recognized figure in large cities, 
dealing not necessarily in bad bills, but in bills not current on the 
spot, and therefore subject to discount. Inequality of value like 
this, even if it is the result of mere unfamiliarity and doubt affecting 
the notes of distant banks, is a defect in a paper currency, and a 
return to it would be a long step backward. Uniformity and 
instant recognition are nearly as important for the paper of the 
country as for its coin, and can only be secured by analogous con- 
centration of control. 

It is to be remarked here that the practical confinement of 
local issues to their own territory has been advocated, especially 
within the last few months, as an arrangement to be desired on its 
own account. Certain sections, it has been contended, suffer for lack 
of sufficient currency, and their needs can be supplied by ample 
local issues, and this with all the more ease and certainty if such 
ample issues have only a restricted circulation. This is doubtless 
true on condition that the local issues are of inferior value, or, in other 
words, depreciated in comparison with the currency of the country at 
large. It is not many years since the whole country, indeed, had a 
local currency available for use only within the United States, and 
altogether cut off by its depreciation from the currency of the world. 
It is not probable, however, that, in contending for localized issues, 
any large number of persons would now seriously propose the 
establishment, or the possibility of establishing, ten, twenty, or 
forty local currencies, each with its own special scale of deprecia- 



THE BANK-NOTE QUESTION 201 

tion and discount. But whether such local issues can be estab- 
lished, and have the effect of insuring local abundance of currency 
without depreciation, is a question which will be considered further 
in the latter part of this paper. 

The proposition, then, to simply abolish the ten per cent tax, 
or by any other process to remit the control of note issue to the 
several state legislatures, appears to the present writer to destroy 
the security of the bank-note by opening the door for abuse and 
mistake, and to sacrifice the immense advantage of a currency of 
uniform value afforded by the national bank system. We have, 
then, to consider next the proposition to widen the range of secu- 
rities on which the issue of national bank-notes is allowed, and to 
extend the right of issue to all banks, whether state or national. 

This second proposition may be taken most conveniently in 
the forms in which it has been stated at different times by Hon. 
M. D. Harter, of Ohio. It contemplates, in the first place, the 
admission of many varieties of first-class securities, as well as the 
bonds of the United States, as the basis of an issue of notes, on 
the general ground, no doubt, that the securities which the com- 
munity finds to be solid enough for the investment of trust funds 
and of other moneys requiring absolute safety are also solid enough 
to be held as a part of the protection required for bank-notes. In 
Mr. Harter's own statement of this plan, 1 long considered and 
carefully weighed as he assures his readers, he proposed to admit 
state, county, city, and railway bonds. In a bill for similar pur- 
poses, to which he has more recently given his support, 2 state and 
county bonds are omitted from the list, probably on the ground of 
some practical difficulties of discrimination between the good and 
the doubtful, and, possibly, in view of some difficulties in the way 
of enforcing payment in case of default. In both forms of the 
proposition, the listing of the bonds for five years upon the stock 
exchange cf some large city, the maintenance of their price at a 
premium of not less than five per cent, and the steady payment of 
interest, the obligation for which must be expressly on the gold 
standard, are among the conditions to be observed, in order that 
bonds may be deposited by any national bank desiring to issue 
notes. So far, then, the proposition is in the line of others which 
have been suggested in the last few years, but for some reason 

1 The Forum, October, 1 891, p. 1 86. 2 Boston Herald, June 14, 1892. 



202 ESSAYS 

never thoroughly investigated, looking to the enlargement of the 
present shrunken basis of the national bank note system. In the 
method of extending the right of issue to state banks, however, 
the two forms of the plan differ radically. In its earlier form 
Mr. Harter proposed that the tax upon notes of state banks 
should cease, provided such notes are secured in the same manner 
as notes of national banks by bonds deposited with the auditor 
or treasurer of the state, and provided that each state should 
guarantee the payment of the notes issued by its own banks, the 
amount of notes to be issued by state banks being determined by 
each state for itself, and the state banks not being required to 
redeem elsewhere than at their own counters. In the later form 
of the plan, after providing that the United States shall no longer 
guarantee the payment of national-bank notes, — a provision 
which is strengthened by the proposed abolition of the present five 
per cent redemption fund, — it is simply proposed that the notes 
of state banks shall be subject to the same tax as notes of national 
banks, and no more. 

In its later form, this plan, to which Mr. Harter has now com- 
mitted himself, is not to be distinguished from the naked proposi- 
tion to simply repeal the tax on state bank issues, leaving them to 
enter the field upon such terms of security and in such quantity 
as the state legislatures may severally prefer, — allowing the 
national banks to compete with them upon terms in some respects 
better than at present and in others worse. The unity and the 
uniformity of value of the bank circulation is to be destroyed, and 
our only security from unsound and depreciated local issues is to 
be found in the chance that all state legislatures may have learned 
equally well the hard lessons of financial safety. 

In its earlier form, Mr. Harter's proposition appears to have 
been more promising. It held out the prospect of a uniform basis 
of security for state issues and national alike. No doubt the first 
attempt to throw into shape rules for its practical operation would 
have shown the necessity of placing both kinds of issue under 
national supervision and control. This would have given the 
system a strong resemblance to that embodied in the first national 
bank act (the act of February 25, 1863), for enabling banks, while 
still carrying on business under state laws, to issue national cur- 
rency secured by the deposit of United States bonds in the Treas- 



THE BANK-NOTE QUESTION 203 

ury at Washington. 1 This provision, which at the time answered 
the purposes neither of the friends nor of the opponents of the 
national banking system, was strongly disapproved by Mr. 
McCulloch, then Comptroller of the Currency 2 and deeply inter- 
ested in extending the national system, was struck out from the 
revised act of 1864, and thus never took effect. At that particular 
juncture, when Congress had undertaken to obtain the whole field 
of circulation for a secured national currency, there was no place 
for such a halfway measure. At the present time, when the 
national-bank notes are being pinched out of existence by the 
failure of Congress to provide a wider basis for them, and when 
unlimited license for state issues is demanded as the alternative 
which is to save us from a paper currency depending for its 
amount upon the bare dictate of Congress, the opportunity for a 
measure which should place state and national issues upon the 
same footing and under the same guardianship would seem to be 
better. But Mr. Harter's proposition, while proposing the same 
basis of bonded security for all issues, falls immeasurably below 
the short-lived scheme of 1863, inasmuch as it lacks the unity of 
control which is the only possible guarantee for faithful and uni- 
form enforcement. It is not surprising, then, that, having once 
set himself in opposition to national control, he should now have 
taken the further step of proposing to leave the regulation of state- 
bank issues altogether to the discretion and prudence of the state 
legislatures. 

In these propositions, which we have taken as somewhat typical, 
and in a large part of the current discussion of this subject, there 
is expressed, as we have said, a strong desire to provide for ample 
local currencies in particular sections. This is quite independent 
of any judgment as to the feasibility of widening the basis of the 
national currency and so rehabilitating that system of issue. It 
is urged as a defect of the national-bank note that it goes into 
circulation "with no localizing tendency, with no habitat, but en- 
dowed with every attribute tending to induce its centralization at 
the great financial cities and its removal from the country dis- 
tricts." 3 In short, it is objected that the bank-notes now have 

1 See sections 61-64 of the national bank act of 1863. 

2 Report of 'the Comptroller of the Currency, 1 863. 

3 Commercial and Financial Chronicle, May 14, 1892, p. 782. 



204 ESSAYS 

the quality of metallic money, and, like gold, will flow and accu- 
mulate as the current of internal commerce may require, having 
hardly more tendency to remain near the place of issue than coin 
has to stay in the neighborhood of the mint, except so far as their 
movements are arrested by redemption at the Treasury. 

It will assist us in weighing the force of this objection if we 
first consider the movement of a currency exclusively of coin. It 
is distinctly recognized that a coin medium will not distribute 
itself with equal depth over sections of a country which differ in 
resources, industry, and acquired wealth. Notwithstanding the 
immense volume of transactions settled finally by exchange of 
products, the farming sections will steadily keep themselves bare 
of coin by their heavy purchases in anticipation of the future, and 
by their normally increasing payments for interest on the capital 
invested among them by non-residents. If they were less enter- 
prising and progressive, payment in products might keep pace 
with their obligations ; but their vigorous industry constantly im- 
pels them to push the use of their credit and to keep their stock 
of money low. As communities, they invite loanable funds by 
high rates of interest ; but no transfer effected in this way gives 
anything more than a temporary relief from the dearth of coin. 
In the present stage of their development they have uses for 
goods which stand higher in their estimation than their uses for 
money. 

In describing the unequal distribution of a medium supposed 
to be exclusively of coin, the language used runs of itself into the 
present tense, as though the imagined medium were really existent, 
because that which is true of coin in this particular is true also of 
a paper currency which is really redeemable in coin and is of uni- 
versal credit. Such paper will serve the purpose of remittance 
and payment as well as coin, and will be collected and remitted 
accordingly, when the conditions of trade would cause coin to be 
so used. This will be effected directly or indirectly by the people 
themselves in making their necessary payments; and the converti- 
ble paper, like the coin in its distribution over the surface of the 
country, will be found in greater depth at the financial centres, 
because it is there that payments are due, and because, under 
existing conditions of supply and demand, payments, if made in 
products alone, can only be completely so made when the local 



THE BANK-NOTE QUESTION 205 

currency is at the minimum quantity. This state of things, which 
we believe is also as well recognized as the inequality with which 
coin alone would distribute itself, is not to be remedied by raising 
the general level of the supply of convertible paper in the country 
at large. Aside from the effect which might thus be produced on 
the movements of money between this country and others, the 
increase of the general mass would only temporarily change the 
relations of the farming sections to others, even if the whole 
addition were first to come into circulation in those sections. 
Their industrial conditions would still cause them to part with all 
but their quota of the increased amount, and they would soon be 
found in possession of only their customary proportion of coin 
and paper, and subject to the same inconveniences as ever. 

But let us now suppose that, instead of a redeemable paper 
having universal credit, each section uses a redeemable paper 
having only local credit, having a " habitat," therefore, and certain 
to circulate only within or near the state in which the issuing 
bank is established. Is it not certain that, if the trade relations 
of an agricultural section are such as would draw away from it 
coin or its paper of universal credit, if such a medium existed, 
they will now equally draw from it coin or legal tender paper, 
these being obtained by sending in bank-notes for redemption ? 
The bank-notes are not themselves available as a remittance ; but, 
if redeemable, they can instantly be turned into that which is 
available. This would leave a really redeemable local currency in 
the same scanty condition, and for the same reasons, as a medium 
of national credit would be under the same circumstances. We 
may, indeed, suppose that the local banks, the issuers of currency, 
continue to issue notes in place of those which are redeemed, and 
attempt thus to raise materially the level of paper in their neigh- 
borhood. In that case, their vaults become the ready source from 
which gold may be drawn for export from the section, and the 
relative cheapness of gold in the section gives a motive for its 
export, either to pay for fresh purchases of goods or for use in 
other money markets. In short, so long as the redemption of 
paper is real, the restricted area of its circulation will not supply 
the means of raising the level of a local currency permanently 
above the mark which is settled by the normal course of payments 
to and from the state or section concerned. It is true that, if the 



206 ESSAYS 

redemption is not real, if the paper is openly or disguisedly incon- 
vertible, it may be heaped up within the given area to an indefinite 
amount and with a corresponding depreciation. 

The question, then, whether the restoration of the state-bank 
issues and their regulation at the pleasure of the states is to be 
followed by real specie payment by state banks or by suspension, 
is of critical importance ; and it may be doubted whether it has 
been faced squarely by those who advocate such issues as a source 
of locally abundant paper. But here, after all, would seem to be 
the kernel of the whole question ; for, on the supposition that 
specie payments are to be maintained everywhere, — as most of 
the advocates of state issues must be supposed to intend, — the 
proposed change must be futile for its avowed purpose ; and, if 
suspension is to follow or to be risked anywhere, the measure 
is an abandonment of that solid ground of hard money which our 
people, after a long and bitter experience, finally reconquered 
under the resumption act of 1875. 

In this discussion the varied political aspects of the question 
before us have had hardly a passing glance ; and it is not worth 
while to enter upon them now, except to notice the frequency 
with which, in one form or another, the argument in terrorem is 
advanced, — the argument that the state-bank issues should be 
freed from restriction lest a worse thing befall us. We are told 
that it is idle to hope for action which shall give a future to what 
is called the national-bank monopoly, and that the state banks, 
therefore, afford the only chance for a credit paper issued in 
response to commercial demand ; and that state-bank notes alone 
can save us from complete surrender of the field to government 
issues ; and that the restoration of local currencies is alone able to 
divert a large section of our people from the crusade in favor of 
the free coinage of silver. It may be true that there is ground 
for anxiety in one or all of these directions. But, if the financial 
history of the United States teaches any lesson, it is this : that, 
with the American people, sound doctrine and salutary measures 
are strongest when their advocates are fearless, and refuse to yield 
ground to the suggestions of timid expediency. 



THE SAFETY OF THE LEGAL TENDER PAPER 1 

The legal tender notes of the United States present now, as 
they always have presented, an appearance of great simplicity. 
There are still but two such issues, the United States notes of the 
Civil War and the coin notes of 1890: their legal tender power 
has few exceptions, and the obligation for their redemption is to 
be read in a few lines. Take away the confusing element intro- 
duced by the silver agitation, which is quite extraneous to the 
original conception of the legal tender paper, and what is in itself 
better suited for easy comprehension or has more prima facie 
attractions than a system of government notes, established by the 
authority and resting on the credit of the nation ? 

But, simple as the notes themselves may appear, it is by no 
simple process that the conditions under which they are now 
issued have been arrived at. Our legislation on this subject now 
covers a period of thirty-five years. During that time there has 
been a rapid succession of important legislative acts bearing upon 
the legal tender paper and some administrative acts of equally 
serious import. The system, as we have it to-day, is, therefore, a 
product, not of any compact declaration by the law-making power, 
but of a singularly complex series of laws and executive orders. 
It is to some aspects of this series, — or, in other words, to some 
aspects of the history of the legal tender issues, — and to some 
considerations flowing therefrom, that I desire to direct the atten- 
tion of readers of this article. Accepting the constitutionality of 
the legal tender acts, as settled by the repeated decisions of the 
Supreme Court, and waiving all questions as to the necessity of 
the acts or of either of them, as foreign to my present subject, I 
wish to inquire what inferences are to be drawn from the manner i 
in which the authority of Congress has been exercised, and how 
far the prima facie attractions of our paper legal tender are 

1 Quarterly Journal of Economics, April, 1897. 
207 



208 ESSAYS 

thereby affected. For this purpose, it will be necessary to make 
a short recapitulation of the chief legislative and executive acts 
which mark the period opened by the first Legal Tender Act and 
relate to the same subject-matter, and to do this even at the risk 
of stating much with which the reader must be supposed to be 
familiar. 

i. The leading advocates of the act of February 25, 1862, 
pressed that measure upon Congress as a temporary expedient 
forced upon the country by the stress of war (1 861-1862, ch. 33). 
They also pressed it as a measure which had its place in a large 
scheme of legislation, by which they expected to provide a per- 
manent paper currency exclusively of bank-notes. To meet the 
urgent needs of the Treasury, a limited amount of legal tender 
notes were to be issued, exchangeable at the pleasure of the 
holder for United States bonds, and the bonds were to be made 
the basis of a bank currency. Issued, exchanged, and reissued, 
the notes were expected to open a market for a large amount of 
bonds, and finally to be absorbed and disappear. It may be 
doubted whether the majority in Congress were then ready to 
accept the whole of this comprehensive scheme, but there is no 
doubt that the majority agreed to the issue as something not 
intended long to survive the exigency which called it into being. 
Even with this restricted view of the scope of the legislation, the 
provision making the notes exchangeable for bonds was plainly a 
matter of prime importance. It was looked upon as offering a 
possible outlet for the notes in case the circulation were overloaded 
with them, and it provided the means for their withdrawal when 
the present need should have passed by and the public credit 
should have begun to advance. The bonds having been made 
coin bonds, the exchangeability of the notes was the ground of 
hope for their present credit and ultimate redemption. 

2. But the expectations of the advocates of the first Legal 
Tender Act were disappointed. Although some sanguine leaders 
had predicted that the whole of the first issue would not be used, 
a second issue was called for by the Treasury, and a third. It 
was also discovered that, so long as notes could be exchanged for 
bonds at par, the price of bonds could not rise above that point, 
and that with this limitation of possible profit the present induce- 



THE SAFETY OF THE LEGAL TENDER PAPER 209 

ment for exchange was too small to invite large operations. At 
the instance of the Treasury, therefore, and in order to facilitate 
the sale of bonds, Congress, in the Ways and Means Act of March 
3, 1863, declared that the right to exchange the notes should 
cease from the first day of the following July (1 862-1 863, ch. 73, 
§ 3). One year, therefore, saw the central provision of the original 
system abolished, and without debate in either House. " This 
act," says Mr. Sherman, in one of his numerous references to the 
subject, " though convenient in its temporary results, was a most 
fatal step, and for my part in acquiescing in and voting for it I 
have felt more regret than for any other act of my official life." 1 

3. The summer of 1864 saw the worst fears as to a resort to a 
paper legal tender fully justified. At the end of June the out- 
standing United States notes were $431,000,000; there were also 
in circulation $168,000,000 of interest-bearing notes which were a 
legal tender for their face ; and, in response to the urgent demand 
of the Treasury, authority for an additional issue of $200,000,000 
of similar interest-bearing legal tender notes was to be embodied 
in the Ways and Means Act. Gold, which in April stood at 180, 
was starting on the rapid ascent which carried it to 240 on the 1st 
of July. Congress was engaged in an unsuccessful effort to pre- 
vent time-sales of gold and of foreign exchange, by means of what 
has been known as " The Gold Bill " ; and confusion, distrust, and 
discredit were rapidly gaining ground. As a reassuring measure, 
therefore, to quiet public alarm, a clause was incorporated in the 
Ways and Means Act declaring that the total amount of United 
States notes should never exceed $400,000,000, and a possible 
temporary addition of $50,000,000, if required for the payment of 
private deposits then held by the Treasury (1 863-1 864, ch. 172, § 2). 
This limitation of the issue of United States notes was a wise 
concession to public opinion, and without doubt had its influence 
in the next few months in raising the public credit ; but the ability 
of Congress to maintain such a restriction under the pressure of 
any great exigency was never put to a severe test, and the happy 
ending of the war nine months later abruptly introduced an en- 
tirely new order of questions relating to the legal tender issues. 

4. So far as the temper of the public was concerned, the first 
months of peace were remarkably favorable for measures looking 

1 Speech in the Senate, March 6, 1876 ; to be found in his " Speeches," p. 496. 



210 ESSAYS 

towards specie payment and the withdrawal of the legal tenders ; 
and it was probably a misfortune that Congress was not then in 
session to improve a moment which in other respects was oppor- 
tune, and to do this before the apprehension of contraction or any 
of the real dangers of that process should be seriously felt. But 
when Congress met in December, 1865, — after the announcement 
of his policy by Secretary McCulloch, — the strength of feeling 
was still such that, by a vote of 144 to 6, the House of Represent- 
atives adopted a resolution of cordial concurrence " in the views 
of the Secretary of the Treasury in relation to the necessity of a 
contraction of the currency with a view to as early a resumption 
of specie payments as the business interests of the country will 
permit," and pledged its cooperation to that end. 

5. A secretary gifted with tact in dealing with other men, 
and standing aloof from the political contests of the time, might 
perhaps have made this proffer of concerted effort the basis of a 
successful policy ; but Mr. McCulloch had not that tact, and was 
so far identified with the reconstruction policy of President John- 
son as to share the odium incurred by the latter in his struggle 
with Congress. Four months after the declaration of December, 
1865, Congress, in making provision for the retirement of Treas- 
ury notes, forbade the Secretary to retire more than $10,000,000 of 
United States notes within the next six months, or more than 
$4,000,000 in any one month thereafter (1865-1866, ch. 28). 

6. The Secretary did not use to its full extent the authority 
allowed him by Congress. The commercial revulsion which began 
in London in 1866 was followed by continued depression in this 
country, the public mind became more and more sensitive on the 
subject of contraction, and wild demands began to be made for the 
payment of the five-twenty bonds in legal tender notes. The 
Finance Committee of the Senate, in December, 1867, reported a 
bill providing for the exchange of these bonds for a five per cent 
coin bond, the offer resting upon the avowed calculation that the 
right of the public creditor was doubtful, and that he would find it 
for his advantage to take a bond bearing a lower rate of interest 
and free from cloud. In the discouraged state of mind indicated 
by this proposition, Congress, in February, 1868, "suspended" 
altogether the authority previously given to the Secretary "to 
make any reduction of the currency by retiring and cancelling 



THE SAFETY OF THE LEGAL TENDER PAPER 21 1 

United States notes " ; and thus the first movement for a return 
towards specie was peremptorily closed (1867-1868, ch. 6). The 
notes outstanding had been reduced from about $400,000,000 to 
$356,000,000; but this reduction had been offset by an increase of 
national-bank notes during the same months. 

7. Happily, the Republican National Convention in July, 1868, 
planted itself on firm ground as to the payment of the five-twenty 
bonds, and in its platform denounced "all forms of repudiation" 
and called for the payment of all creditors, " not only according to 
the letter, but the spirit of the laws." The Democratic party a 
few weeks later gave its support to what was supposed to be the 
popular craze of the day, and upon this issue and others was badly 
beaten. General Grant was elected after an excited canvass ; and 
the popular verdict was registered in an " Act to strengthen the 
Public Credit," approved in March, 1869, being the first act passed 
under the new administration. This law declared the faith of the 
United States to be pledged to the payment of both notes and 
bonds in coin, except when the law under which they were issued 
had expressly provided for payment otherwise, and closed by 
further pledging the faith of the United States " to make provision 
at the earliest practicable period for the redemption of the United 
States notes in coin " (1869, ch. 1). 

8. Nothing was done towards giving effect to this pledge. 
Secretary Boutwell, in December, 1869, suggested that authority 
should be given for reducing the circulation, as occasion might 
offer, by an amount not exceeding $2,000,000 in any one month ; 
but it was clear that he did not regard the matter as of any 
present importance, and no action was taken. Congress had 
apparently acquiesced in the policy of allowing the country to 
"grow up " to a currency admitted to be excessive. A year or 
two later, however, it appeared that the Treasury had on more 
than one occasion issued legal tender notes in lieu of a part of 
those "retired and cancelled" by Secretary McCulloch. The 
question as to the legality of any such reissue was referred by the 
Senate to its Finance Committee ; and the majority of that com- 
mittee, headed by Mr. Sherman, reported a resolution that the 
Secretary " has not the power under existing law " to issue notes for 
any portion of those retired under the act of 1866. The question 
involved was of moment ; for, if $5,000,000 could be issued by the 



212 ESSAYS 

Secretary at his discretion, so could $44,000,000, and the whole of 
the ground supposed to have been gained by the payment of this 
form of debt might thus be lost. The resolution, however, was 
not called up for action, and at the end of the session the Secretary 
might easily have felt that his action had the tacit acquiescence 
of Congress. 

9. Mr. Boutwell's successor, Secretary Richardson, having 
paid out in the revulsion of 1873 a large part of his cash balance 
in the vain effort to relieve the money market by the purchase of 
bonds, soon found himself so crippled by the decline of revenue 
that in October, 1873, he began paying out the retired notes for 
ordinary expenses; and this reissue was continued until, at the 
beginning of February, 1874, when the revenue had recovered 
from its collapse, $26,000,000 of the notes were again in circula- 
tion, raising the total to $382,000,000. 

10. At the long session of 1874 Congress first passed the 
so-called inflation bill, vetoed by President Grant, by which the 
issue of legal tender notes was to be increased to $400,000,000 
and the possible issue of national-bank notes was to be raised to 
the same point, and then adopted the Compromise Act of June, 
1874, by which, among other provisions, it was declared that the 
amount of legal tender notes should be fixed at $382,000,000 
(1873-1874, ch. 343, § 6). The amount reissued by Secretary Rich- 
ardson was thus made a part of the permanent currency, and so 
remained until the work of withdrawal began anew under the 
Resumption Act of 1875. 

11. The Resumption Act was not prepared with open doors; 
and, doubtless, there is much in its secret history which would be 
of great interest. Certainly, its public history, if we view it as a 
measure for financial reform, is unique. The bill, introduced by 
the Finance Committee of the Senate, was admitted to be the 
work of a party caucus, in which no agreement could be reached 
except by consenting to leave a principal point unexplained. 
Whether legal tender notes, when "redeemed " in the language of 
the bill, could be reissued or not, Mr. Sherman, who had charge 
of the measure, steadily refused to say, knowing well that any 
explicit answer would drive off one wing or the other of his 
expected majority, and deeming it his business to carry the bill 
through by whatever means. It was passed by the Senate, there- 



THE SAFETY OF THE LEGAL TENDER PAPER 213 

fore, with an obstinate refusal on the part of its chief advocate to 
state the meaning and effect of its leading provision. In the 
House all risk of explanation was avoided, by forcing the bill 
through without debate under the operation of the previous ques- 
tion ; and thus the great work of resumption was entered upon, 
with absolutely no authoritative determination of the main question 
whether redemption would end the legal tender currency or not 
( 1 874-1 875, ch. 15). It was only certain that, when the measure 
should finally be interpreted for purposes of administration, one 
section or the other of its supporters would meet with bitter dis- 
appointment. 

12. As a preparation for actual specie payment in 1879, tne 
Resumption Act provided for a gradual reduction of outstanding 
legal tender notes from $382,000,000 to $300,000,000, so far as such 
reduction could be offset by the issue of national-bank notes by 
new banks, or by old ones increasing their circulation. This de- 
vice for avoiding a contraction in the total currency was defeated 
by an unexpected surrender of bank circulation under the pressure 
of the times; and the consequent net reduction of legal tender 
notes and bank-notes came to be regarded in some parts of the 
Union as the cause of the depression, which deepened in this 
country in 1876 and 1877 as it did in the greater part of Europe. 
When Congress came together in October, 1877, a bill was at once 
reported to the House by the Committee on Banking and Currency 
to repeal the third section of the Resumption Act, this section con- 
taining all the provisions as to the redemption of the United States 
notes. With an amendment exempting from repeal the provision 
for free banking, this bill was passed in the House and went to 
the Senate. That body amended the House bill so as to make it 
simply a bill for making United States notes receivable in payment 
for the four per cent bonds and also for customs duties, and finally 
passed it in this form in the following June by a vote of 45 to 15. 
But, while this measure was pending in the Senate, and in view of 
the probable disagreement of the two Houses, the mover of 
the House bill introduced there a short bill to forbid the further 
retirement of legal tender notes; and this was hurriedly passed 
through both House and Senate, and became a law May 31, 1878 
(1 877-1 878, ch. 146). This momentous act, which finally settled the 
question as to the meaning of " redemption" in the Resumption 



214 ESSAYS 

Act and completed the conversion of the United States notes into 
a permanent currency, — an act scarcely inferior in its importance 
to the Resumption Act itself, — was adopted almost without debate. 
The issue at that moment stood, as it stands at present, at 
$346,681,016. 

13. The reserve of gold, accumulated for the redemption of 
legal tender paper under these changed conditions, received a 
tardy recognition from Congress in 1882, when, under the act for 
extending the charters of the national banks, it was provided that 
the issue of gold certificates by the Treasury should be suspended 
" whenever the amount of gold coin or gold bullion in the Treasury 
reserved for the redemption of United States notes falls below one 
hundred millions of dollars " (1881-1882, ch. 290, § 12). No means 
of replenishing this reserve have ever been provided, except those 
named in the Resumption Act, — surplus revenues and bonds of the 
descriptions authorized by the Refunding Act (1869- 1870, ch. 256). 

14. The winter of 1889 and 1890 brought a fresh outburst of 
agitation for the free coinage of silver, at a time when the compul- 
sory coinage of silver dollars under the Bland Act of 1878 was 
finally submerging the Treasury. The result of several months 
of debate in Congress was the passage of the Silver Purchase Act 
of 1890, by which Congress required the purchase of 4,500,000 
ounces of silver per month, payment therefor to be made in " coin 
notes," which were to be a legal tender and to be withdrawn from 
circulation only when replaced by an equal amount of the silver 
dollars (1889- 1 890, ch. 708). This provision for adding to the legal 
tender paper is the only part of the act which there is occasion to 
consider here. The reduction of legal tender circulation had been 
made impossible by the act of 1878 ; and Congress now ordered its 
periodical increase, by such an amount as should be required by 
the stated purchases of silver, without limit, and with no discre- 
tionary power of suspension in any exigency. It was declared to 
be the policy of the United States to maintain the " parity " of gold 
and silver ; but no provision was made for an increase of the gold 
reserve established for the protection of the United States notes, 
in case " parity " meant the maintenance of the gold standard. 
It was provided on the other hand that the coin notes might be re- 
deemed in silver at the pleasure of the Secretary, so that the decline 
to the silver standard appeared to be a matter of probable ultimate 



THE SAFETY OF THE LEGAL TENDER PAPER 215 

necessity. The new measure was, therefore, a surprising sequel 
to the long effort made to place the legal tender notes on the solid 
footing of gold. 

15. Not many months had passed before the saturation of the 
currency with legal tender paper and silver was proved by the 
slackening of gold payments for customs duties. In the spring of 
1893 the new coin notes outstanding had risen to $140,000,000, 
and the increase then going on was not far short of $4,000,000 per 
month ; gold receipts at New York were nearly dried up, and the 
gold reserve in the Treasury was falling below the prescribed 
$100,000,000. The visible danger of the suspension of gold pay- 
ments precipitated the violent monetary panic which culminated 
in July. Congress was called together in August to provide the 
means of financial safety, and the repeal of the clause in the act of 
1890 requiring the purchase of silver was carried, after a parlia- 
mentary contest which lasted for eighty- two days (1893, ch. 8). 

These are the leading points in the history of a currency now 
old enough to have had its trial in every variety of national for- 
tune, — in prosperity and in adversity, in war and in peace. As 
an exhibition of unsteady purpose, the record appears to me to be 
without a parallel, considering the gravity of the subject-matter. 
This is the manner in which the nation has dealt with the paper 
legal tender which practically lies at the base of the great mass of 
its credit transactions, — used concurrently with gold no doubt at 
present, but for many years used almost exclusively, and possibly 
in some contingency destined to be so used again. The customary 
paper circulation, which should rest on a bed-rock of law as 
unchangeable as anything of human institution can be, has lain 
upon a quicksand. Instability has been the leading characteristic 
of our legislation on this subject for a third of a century. 

If we consider the course pursued by the other leading nations 
in their management of currency and kindred matters, the contrast 
is remarkable. England has made no important change in her 
currency system for over fifty years, and, notwithstanding the 
inviting field which it presents for the reformer, still prefers not to 
risk her reputation for absolute safety upon possible, but still un- 
certain, improvements. France has kept her system without sub- 
stantial change, except in the scale of its operations, ever since the 



216 ESSAYS 

absorption of the departmental banks by the Bank of France in 
1848. The war with Germany, suspension of specie payments, 
revolution, invasion, and defeat tried the strength of her legisla- 
tion and of her confidence in it ; but it stands to-day nearly as it 
stood before 1870, except for the legal tender power then given to 
the notes of the Bank of France. Germany laid her course in her 
coinage and bank acts of 1871 to 1875, and has followed it from 
that day without deviation, her occasional legislation upon this 
subject being directed steadily to the completion of the system as 
originally planned. These nations now have an unfailing confi- 
dence in the steadiness, permanence, and soundness of their own 
monetary arrangements ; and a chief element in that confidence 
is the certainty that serious change is not within the range of 
probability. 

This contrast, though still disadvantageous, would be less pain- 
ful if in the rapid succession of changes made by our government 
there were discernible any approach to continuity of purpose. A 
consistent policy might be developed or a system might grow up 
by a succession of short stages, and the wisdom of the process 
might be justified as regards its intention, if not as regards its skill. 
But no such continuity is to be found in the series of measures 
recapitulated above. Fundamental principles are adopted at one 
time and abandoned at another. The automatic absorption of 
notes by bonds, their systematic retirement and cancellation by the 
discretionary authority of the Treasury, the payment of them as a 
debt, the idea of fixity of amount, and that of an adequate reserve 
in proportion to the amount, — such conceptions as these have 
been held for a time, then dropped, then succeeded by others, per- 
haps equally short-lived. The series of acts, as a whole, points to 
no particular end, its several parts have no systematic tendency or 
common direction. The steps taken have been without logical 
order, and the important consequences following have often been 
neither expected nor desired. The line traced by these measures 
is in fact a legislative zigzag, not a line of development. 

When we inquire for the cause of such a mortifying result from 
thirty-five years of constantly renewed financial anxiety and debate, 
we must find it in the general absence of any sense of responsibility 
for the formation and maintenance of a consistent policy. Not 
many of our Secretaries of the Treasury have found it worth while 



THE SAFETY OF THE LEGAL TENDER PAPER 21? 

to plan and act for any distant future, they knowing well that 
executive initiative counts for but little in the end ; and, moreover, 
whatever secretaries may desire, no Congress can be relied upon 
to carry out the purposes of a predecessor. Inspection of the list 
of acts shows that usually some accidental conjuncture or some 
supposed popular demand has been the real spring of action in 
each case, and that for the individual legislator a supposed man- 
date for the passing moment has generally been enough to dis- 
charge him from all personal responsibility. 

Consistency in the popular demand is not a characteristic of 
our politics. The American people can be relied upon with confi- 
dence in a sufficiently alarming crisis, finally and after great tra- 
vail, to rally in support of the honest and wise course in any 
matter of high policy ; but this result is often reached only after a 
season of painful doubt and seeming vacillation, and after much 
mischief. The last year, for example, witnessed the latest of a 
series of occasional appeals to the sound common sense of the 
plain people, in which the result was fortunate, to be sure, and em- 
phatic, but was obviously too long left in uncertainty. How should 
we expect the sense of legislative responsibility for a continuous 
course of action to be developed under such conditions ? How 
can we wonder that the congressman is too anxiously mindful of 
the shifting mass of opinion behind him, on which his political 
future depends, to resist the passing demand for change ? Or why 
should our financial legislation be less changeable and inconsistent 
than our tariff legislation, in which we are now expecting the third 
radical alteration, not to say revolution, effected in the space of 
seven years ? 

Is it even surprising that, on the whole, the net result of con- 
flicting financial acts should be a general weakening of our system 
and a loosening of the grip upon hard money? The fact is in- 
dubitable. For proof of it we need only compare, first, the condi- 
tion of things in 1865, when there was a general consensus of 
opinion that the return to specie payment was a manageable prob- 
lem for early solution; second, the condition in 1875, when, after 
a year of painful tergiversation, a Resumption Act was finally 
carried through in deference to a manifest public opinion, although 
by means of an agreement that its terms should be unintelligible ; 
and, third, the recent state of affairs, when the country has repeat- 



218 ESSAYS 

edly found itself brought dangerously near the verge of a fresh 
suspension, and has still found it impossible to obtain a line of 
legislation demanded for the better protection of the national honor 
and well-being. The reason for this irregular, but on the whole 
progressive, relaxation on the side of political morals, at the same 
time that we have secured specie payment, is not far to seek. In 
any debate where the fateful words "contraction" and "relief" 
are heard, the fears and demands of a sufficiently noisy minority 
have extraordinary potency, especially in the even years which 
witness the national elections ; and ground once lost by any weak- 
ness in this part of the field of politics is regained with great dif- 
ficulty. The country is now and then roused to the fact that it is 
slipping down a dangerous declivity; but, after all, even under a 
government of and for and by the people, it is not always easy for 
the clear will of the majority to find expression in law. 

It is not to be assumed that the cause of this legislative inca- 
pacity to deal firmly with a subject of the gravest importance is to 
be found in special defects of character, intellectual force, or proper 
purpose among the men who make up the Congress of the United 
States. The parliamentary bodies in other countries as well as our 
own suffer from the follies of individual members, often fail to do 
their duty, and are the objects of criticism and satire. Under their 
forms of parliamentary government, however, they are in a meas- 
ure protected from what might prove to be their own incapacity, 
— sometimes by traditional modes of procedure, sometimes by posi- 
tive rules, and generally by established forms of political organiza- 
tion and leadership. Without the defences of this kind which time 
and habit have thrown around the House of Commons, that body 
might easily find its action as much a matter of chance, and as 
little to be relied upon under the strain of an unsettled public 
opinion, as that of the House of Representatives. Add to the 
differences in customary procedure the fact that it is our usual 
practice to elect to Congress no one who is not a resident of the 
district to be represented, — so that disagreement with local opin- 
ion often means for the member not merely failure at a new elec- 
tion, but political death, — and there are reasons enough why 
Congress should have failed so conspicuously to frame and defend 
any consistent line of policy as to the paper currency. 

A few words should also be said here as to a phase of popular 



THE SAFETY OF THE LEGAL TENDER PAPER 219 

opinion with which members of Congress have long had to reckon, 
— a phase of opinion singularly persistent and general, showing 
itself in an extreme dread of " contraction." The long deprecia- 
tion following the great issues of United States notes during the 
war impressed upon the public mind the consequences of inflation, 
so deeply that the lesson is nearly as vivid to-day as it was thirty 
years ago. The majority, no doubt, have a wholesome dread of 
any tendency in that direction ; and a minority, perhaps, desire 
such a tendency in some form or other, with more or less crude 
notions as to controlling the results. But, whether resisting infla- 
tion or favoring it, the great mass of our people clearly have a 
strong belief in the effect of quantity upon the value of a circula- 
tion ; and this appears to make up the greatest part of their simple 
creed as to money. To hold the currency where it is becomes the 
ideal of steady management ; and contraction becomes an evil in 
itself, and perhaps more dreaded even than inflation, because its 
earlier stages are more painful. 

The dread of contraction was the one argument against resump- 
tion which had any strength with the public ; and it has not lost its 
power since, although we plainly have the whole world upon which 
to draw, if our own supply is below our needs. A morbid anxiety 
as to the sufficiency of the currency to-day possesses the public 
mind, as is shown by the copious statistics with which the govern- 
ment publications constantly strive to reassure the people, and by 
the frequent efforts of Presidents and Secretaries to satisfy public 
opinion as to the care with which the supply of currency is insured. 
No other country of importance shows this hypochondriac anxiety 
as to its symptoms, or gives a tithe of the attention given by ours 
to the mere quantity of its money ; and no one of the leading com- 
mercial countries, it must be said, is either so favored by fortune or 
so constantly in trouble in this respect. But our excessive sensi- 
tiveness on this point is obstinate : it has apparently been increased 
by the course of the discussion as to silver, and we are still abso- 
lutely unwilling to trust to the operation of natural laws for the 
adjustment of the amount of our active currency. 

The necessary conclusion from our experience with the legal 
tender notes plainly is that a government currency, under our 
conditions, is an unfit subject for national legislation. Many sub- 
jects required legislation in the heat of civil war which are recog- 



220 ESSAYS 

nized as having no place in time of peace ; many powers were then 
called into use, from stern necessity, which have been laid aside, 
like disused weapons consigned to the arsenal. A system which 
makes the usual legal tender of the country a subject of current 
legislation risks too much upon the chances of mistake, attack, and 
uncertainty. It is a familiar and useful practice in our legislative 
bodies to recognize some subjects as fitted for treatment by general 
laws, in order that they may be freed from the uncertainties and 
may not add to the temptations which beset the work of every 
legislature. The case of the paper currency of the country is 
analogous to this, in that for safety it requires to be placed upon 
such a basis as shall reduce to the minimum the chances of its 
coming up for action and shall prevent a constantly recurring 
anxiety as to its future. 

What happens with a paper legal tender is far different from 
the course of legislation as to the legal tender coin. With regard 
to the latter the government fixed its standard and established its 
system of coinage in 1792, and then found at the most only two 
occasions for legislation as to other matters than mere detail, until 
the silver question presented itself in 1878. But the paper legal 
tender never has been, and it is safe to say never can be, put upon 
a basis where it can have a like course of freedom from change. 
Resting purely upon credit, and regarded as a creation of money by 
mere act of Congress, it steadily invites alteration, the removal of 
this limit or that, the increase of its amount, or the alteration of its 
coin basis. The reserve to be held in the Treasury under any safe 
adjustment can never fail, from its magnitude, to attract the covet- 
ous gaze of the schemers who throng around the great source of 
government bounty. In addition to these risks to which the paper 
legal tender is exposed, it has also to meet those arising from the 
silver controversy now threatening the coin. It was well rec- 
ognized six months ago that in the event of Mr. Bryan's elec- 
tion the legal tender paper might be suddenly lowered to the 
silver standard, by the mere substitution of silver redemption for 
gold, and by mere executive order. It is not fit that the paper 
currency of the country should thus be kept adrift, or that the 
people of the country should be called upon periodically to rally 
for the safety of something which fails of one of its main purposes 
if it is not kept free from any suspicion of danger. 



THE SAFETY OF THE LEGAL TENDER PAPER 221 

The passage of the Silver Purchase Act of 1890 is a striking 
illustration of the peril of the present situation. Two explanations 
have been given of the causes which united a majority of both 
Houses in favor of an act which proposed a steady dilution of the 
paper currency, involving the ultimate suspension of gold payments 
and final degradation of our standard to the level of silver. One 
explanation, current at the time and long afterwards, was to the 
effect that a majority of both Houses favored the free coinage 
of silver, that President Harrison could not be relied upon to veto 
a bill framed for that purpose, and that the insane " experiment " 
of buying the domestic product of silver by new issues of paper 
was resorted to as a compromise, in dread of a more rapidly 
working measure and one which would leave no locus peniten- 
tiae. The other explanation — given in the Senate nearly a year 
ago by Senator Teller — was to the effect that the Silver Pur- 
chase Act was the consideration for which the silver interest, 
holding the balance of power in the Senate, was induced to give 
its support to the Tariff Act of 1890, then on its passage. This 
statement of the transaction, made by one who did not hesitate 
to declare himself one of the contracting parties in the case, has 
the greater intrinsic probability ; but, be that as it may, let the one 
account or the other be the correct statement, it is true in either 
case that legislature and executive were alike ready to cut the 
paper currency adrift from the solid standard and to let it float 
towards depreciation. In the one case this would be for the 
reason that a sound currency was doomed in any event ; and in 
the other case for the reason that neither Congress nor President 
regarded its sacrifice as anything more than a proper makeweight, 
to be thrown in for the sake of securing a higher scale of customs 
duties. 

Is there another country in the world, outside of South America, 
in which a paper legal tender, with all the possibilities implied in 
its misuse, would be dealt with in this fashion ? The election of 
1896 and all that has followed inspires confident hope of a less 
troubled future ; but, after all, what guarantee have we that the 
amazing defection of 1890 may not be repeated within half a dozen 
years ? Such an untoward result would mean no greater revolu- 
tion than that which took place in the half-dozen years ending with 
1890 : indeed, it maybe doubted whether in the minds of most men 



222 ESSAYS 

the assurance of safety is not sensibly weaker now than it was 
before that year. 

The case of 1890 shows the peril that may come from positive 
action by Congress, and the last three years have shown with equal 
distinctness the dangers to be feared from its inaction. Since the 
beginning of 1894 there has been a necessity for the periodical 
replenishment of the gold reserve. Withdrawals, sometimes for 
export and sometimes from precaution, have brought the stock of 
gold down to the danger point ; and it has been filled up by the 
proceeds of successive loans, amounting to over $260,000,000. It 
is immaterial whether the cause of this steady borrowing, for the 
payment of a debt which is not thereby diminished, is to be found 
in what has been called the " endless chain " of notes redeemed, 
reissued, again redeemed and again issued, or is to be found in a 
deficiency of revenue. In either case the evil was flagrant, and it 
was the business of Congress to apply an appropriate remedy, — 
by fresh taxation in the one case, or by modifying the system of 
reissue under the act of 1878 in the other. But it will be within 
the recollection of every reader that Congress found itself abso- 
lutely unable to act. Four times the necessity for borrowing has 
presented itself, with a suspension of gold payments as the only 
alternative. On three occasions out of the four Congress was in 
session at the critical moment ; but it uniformly appeared that action 
was out of the question. Grant that the responsibility for failure 
lay with a factious few and not with the majority, and the fact still 
remains that the Congress of the United States was unable to act 
in an emergency created by its own legislation. It was even unable 
to apply the palliative of providing for the issue of shorter bonds, 
bearing a lower rate of interest than those to be issued under the 
act of 1870, a bill for that purpose passed by the House in 1896 
having been converted by the Senate into a bill for the free coinage 
of silver. For three years, therefore, the credit of the government 
and the standard of prices and payments have remained, not with- 
out defence, — for the executive still performed its duty with the 
means afforded by the half-forgotten provision in the Resumption 
Act, — but so shaken at intervals as to cause constant dread, some- 
times nearly degenerating into panic. 

A currency which is exposed to such dangers as these cannot 
be called safe in any proper sense of the word. The wealth of 



THE SAFETY OF THE LEGAL TENDER PAPER 223 

the promisor of the note is unspeakable, but from time to time the 
application of that wealth in fulfilment of the promise is not beyond 
question. The power to enforce the legal tender of the note at its 
face in payment of debt is absolute, but the standard of its value 
has never been made secure. For thirty-five years the policy of the 
law in regard to this currency has been uncertain, and the causes 
of this uncertainty have gained in strength and multiplied as time 
has gone on. One ingenious expedient and another is suggested 
for regulating the use and redemption of the notes, in the hope of 
giving them steadiness and securing somewhere a power of con- 
trol; but there is no escape from the fatal objection, that the direct 
power of legislation is not only paramount but is beyond the con- 
trolling force of any steady political influence. In short, not only 
is there no guarantee, but there is no probability that the history 
of these issues, if they continue for another generation, will be any 
less checkered than it has been in the last. Without dwelling upon 
such forebodings, however, it is enough to say here, that while the 
very foundation of all credit is thus left doubtful neither the credit 
of the nation nor that of the mass of its citizens can reach its 
proper strength. None can profit by such uncertainty except 
those whose command of wealth enables them to secure them- 
selves, at the expense of others, against the hazards of the future. 

The necessary alternative to the issue of paper currency by the 
government is the delegation of this function to banks and the 
complete substitution of private credit for public as the medium 
of exchange in domestic operations. A large proportion of these 
operations are already performed by means of bank credit, with 
an adjustment to the needs of the day which is nearly automatic ; 
and the only relief from the increasing perils of the present situa- 
tion is to be found in the same direction. This reliance upon 
banks would not, necessarily, mean the absorption of the whole 
right of paper issue by the national banks, although this absorp- 
tion would have much to recommend it ; but it would clearly imply 
the confinement of the right to banks working under tolerably uni- 
form conditions, as the guarantee of their safety and wide credit, 
and therefore presumably under some kind of national regulation 
and supervision. 

Even with the use of bank-notes, then, the paper currency 
must continue to be a subject of national legislation. There is, 



224 ESSAYS 

however, an important distinction in the kind of legislation called 
for by government paper and by bank paper respectively, and 
a great difference in the risks to which we may be exposed in the 
two cases. Congress has had the national bank system before it, 
for any necessary legislation, for almost the same length of time 
as the legal tender issues ; but the course of action in the two 
cases offers no point of resemblance. Inconsistent and essentially 
weak as the dealing of Congress with the legal tender issues has 
been, its legislation as to the banks has on the whole been marked 
by steady purpose, has tended to complete the original system, 
and as a general result has materially strengthened it. Deserv- 
edly or not, the banks have from the start had abundance of ene- 
mies, in Congress and out of it ; but the bank legislation, if not 
uniformly wise, has been sparing in amount and usually directed 
to the details rather than the general structure and credit of the 
system. Comparison shows clearly that for thirty odd years the 
legislator has approached bank questions from an entirely different 
point of view and in a different frame of mind from that which has 
led him to such unfortunate results in acting upon legal tender 
notes. He has not felt the same temptations, he has not been 
under the same outside influences, the pressure of the times has 
not turned his thoughts in the same direction. The fundamental 
difference in the two cases is no doubt explained by La Roche- 
foucauld's familiar maxim, that " it is easier to be wise for others 
than to be wise for one's self." The legislator has found it con- 
genial and easy to hold others to the strict line of their obligations 
and of sound public policy, but not so easy to observe this line 
in deciding as to what lay within his own hand. His greatest 
folly in dealing with the banks — the absurd attempt, made by 
Congress in 1881 and foiled by the veto of President Hayes, to 
force a reduction of the interest of bonds held by the banks- — was 
after all not a measure of relaxation towards them, but one of 
severity. 

This natural tendency of Congress, considered merely as a 
collection of human beings, to exact more from others than from 
themselves, is undoubtedly strengthened by the kind of presump- 
tion established in the popular mind to the disadvantage of any 
corporation, in questions of responsibility or of seeming conflict 
of interest. The national banks have felt the pressure of this 



THE SAFETY OF THE LEGAL TENDER PAPER 225 

influence against them, in cases where they have sought for changes 
of legislation which would have been for the general advantage. 
No doubt in such cases impartiality of judgment would better have 
befitted the legislator than unfavorable prepossession ; but, after 
all, can it be doubted that the disposition to say " No " has had an 
important place among the causes for the general steadiness of our 
bank legislation ? To hold the banks to their obligation and to 
grant them few favors has been the rule, and the existence of any 
rule analogous to this in dealing with the legal tender issues would 
have given an entirely different cast to that unfortunate chapter of 
our history. 

The nations already referred to as able to manage their curren- 
cies successfully and quietly have all done this by delegating the 
power of issue to banks. They have established their banks on 
different principles, but have agreed in the general policy of throw- 
ing upon them certain duties and restricting the field of probable 
legislation. That their systems have a remarkable steadiness and 
permanence has already been pointed out. These systems they 
also strengthen, as time goes on, not so much by legislation as by 
practice, by public opinion, and by the establishment of traditions 
of duty on the part of the banks themselves. Both in England 
and in France the legislative power takes distinctly the attitude of 
observation, towards an establishment which is conducted for 
private profit, but is intrusted with a quasi public function. In 
Germany the imperial control of the Reichsbank makes the rela- 
tion somewhat different, and yet a note circulation of remarkable 
stability has been built up there on the basis of private capital 
invested in order to earn a profit. 1 In neither one of the three 
countries does the regulation of the currency present itself as a 
subject for ordinary legislation. 

But it is not necessary for the present discussion to enter upon 
the general considerations for or against a paper currency consist- 
ing of bank-notes alone ; and I shall only call attention here, in 
conclusion, to the often-repeated argument that a government issue, 
being a loan without interest, results in a saving to the Treasury 

1 There are still outstanding in Germany imperial treasury notes (not made a legal 
tender) to the amount of 120,000,000 marks, remaining from the larger issue made in 
1875 to replace the notes of the several German states. But this exception to what is 
said above is not important. 
Q 



226 ESSAYS 

which is lost when the right of circulation is delegated to banks. 
The experience of the United States in the last five years alone 
presents a complete answer to this penny-wise reasoning. In that 
space of time the people of the United States have lost by shaken 
confidence, discouraged enterprise, and the actual ruin of thousands 
of citizens, resulting from the mismanagement of their currency, 
an amount beyond all comparison with the annual saving of per- 
haps $12,000,000 made by them at the Treasury. The thrill of 
alarm which runs through the country whenever the gold reserve 
dips too far below the line, or when there is delay or doubt in 
applying the costly remedy, means a loss to the people to be 
measured only by scores of millions. The monetary panic of 1893 
alone, by its direct results and without reference to the stagnation 
which followed it, was enough to counterbalance all savings of 
interest made by the Treasury in the last twenty years. 

But the question as to the means of securing the safest paper 
currency is one in which the consequences to the national industry 
and prosperity are on a scale so vast that any attempt at pecuniary 
measurement appears irrelevant, — as irrelevant as it would be to 
draw from the post-office deficit a conclusion as to the maintenance 
of the postal service by our people. No such calculations are 
needed to show that our people cannot afford to rest content with 
a system which their experience for a generation has shown to be 
radically unsafe. So long as such a system continues, its history 
must continue to repeat itself. Errors made in the past will be 
made also by the new men in the future ; and the possibility that, 
in any moment of popular discouragement or passing delusion, 
some fresh experiment or abandonment of wholesome limitation 
may be resolved upon in haste, but with irreparable results, must 
continue to be a standing menace to our credit, public and private. 



THE NATIONAL BANKING SYSTEM 1 

Of the constituents of our paper currency the government 
notes are amply shown by the history of the last thirty years to 
be the dangerous element. Experience has shown that we can 
rely upon no principle or policy as a safeguard against the caprice 
or the temptation, which at intervals must surely beset any legis- 
lative body having control of the direct issue of paper. The 
bank-notes, on the other hand, have been jealously guarded and 
strengthened by legislation, until they resemble a government 
issue resting upon a special fund of cash and securities rather 
than the promises of corporations. In their case the present need 
of reform is not the result of excess or of insecurity. Their in- 
crease is under heavy restraint, and they are as secure as the credit 
of the government can make them. Their grand defect is want 
of adaptation to the proper business of banking, which limits their 
usefulness in some parts of the country and makes them practi- 
cally unavailable for issue in others. 

The framers of the bank acts of 1863 and 1864, which have 
become Title LXII. of the Revised Statutes, had their attention 
fixed chiefly on the provision of a paper currency of uniform value 
throughout the United States, which should absorb by permanent 
investment a certain amount of United States bonds, and should 
become the sole paper currency of the future. Indeed, the title of 
each act, " An Act to provide a National Currency, secured by the 
pledge of United States stocks [or bonds], and to provide for the 
Circulation and Redemption thereof," sufficiently shows the point 
of view from which these measures were regarded. The provi- 
sions as to the general business of banking were, no doubt, greatly 
in advance of those existing in many states ; but, after all, it was 
the issue of notes upon a secure basis which interested Congress 
and the public at the time, and has continued to be a leading con- 

1 Quarterly Journal of Economics, October, 1897. 
227 



228 ESSAYS 

sideration in national legislation on this subject ever since. Per- 
haps the failure of the national system to meet the wants of large 
sections of country might not, even now, have secured the atten- 
tion which it deserves, had not the provision for the safety of the 
notes finally undermined the issue and threatened its extinction. 
The inability of the system as it stands to perform steadily and 
satisfactorily its chief duty of supplying the business of the coun- 
try with a safe and adequate currency, has finally brought the 
whole subject of banking under discussion, and has raised the 
question as to the proper coordination of issue with the other 
functions of banks, in a more radical form than for thirty years 
before. 

Although the purpose of this paper is to consider some of the 
points at which, in the judgment of the writer, the national banking 
system has proved to be badly adapted to the present needs of the 
country, the writer must premise that the national system appears 
to him to be the foundation on which any reform of our bank-note 
currency must necessarily stand. Experience under that system 
has shown plainly the gain secured by uniformity of regulation 
and unity of supervision. There is no question that the national 
banks find their credit in every form strengthened by the fact that 
all rest upon the same law, universally known, and are under the 
same recognized authority, whose mode of operation is universally 
understood. That the convenience of their notes for use is mate- 
rially increased by this unity of regulation, and by the uniformity 
of design of the notes themselves, is perhaps the one point in the 
working of the national system as to which all are agreed. To 
replace such a system by any complex arrangement by which the 
right of issue should be extended to state banks would be a pal- 
pable sacrifice of advantages, from which the public as well as the 
stockholders of the banks are now gainers. It has been proposed 
that such state banks as may accede to proper regulations pre- 
scribed for safety and solvency should be allowed the right of 
issue. But it is difficult to see how such regulations could be 
enforced with certainty except by the authority of the United 
States, or by that authority without much risk of friction and 
possible conflict between national and state jurisdictions, or with- 
out such strictness of rule and superintendence as would destroy 
the reasons for preferring state organization to national. The 



THE NATIONAL BANKING SYSTEM 229 

last-named consideration is the more serious when we consider the 
fact, not to be disguised, that in many states the local opinion as 
to what is safe regulation and what is not is too loose to be satis- 
factory beyond the state line. In short, practical as well as the- 
oretical difficulties begin to multiply, as soon as we attempt to 
reconcile the conception of a really national currency with anything 
short of an absolutely uniform system of safeguards. 

The banking history of the United States has been for the most 
part a succession of catastrophic changes rather than a process of 
steady growth. One expedient after another has been taken up, 
abruptly dismissed in its turn, like the two Banks of the United 
States, or suddenly revolutionized, like the currency provisions of 
the Independent Treasury Act. The national banking system has 
now had a longer term of active existence than any other national 
system adopted in this country, or any important state system of 
issue. Seriously as its defects have limited its usefulness, it has 
grown in strength and credit. In the course of a generation it has 
collected a mass of legislation, judicial precedents, and rules of 
official practice, which make up a body of administrative law of 
remarkable completeness and value, known from one end of the 
Union to the other, — a common possession, in which it is not 
impossible that all our people may yet come to appreciate their 
common interest. This is a foundation to build upon, not an 
experiment to be dismissed and superseded by some other. Never 
since the early part of this century has there been a like opportu- 
nity to improve our legislation upon banking and currency by the 
proper adjustment of an existing system, old enough and success- 
ful enough to have acquired an historical position and credit. We 
now enjoy an advantage analogous to that which England finds in 
making the ancient reputation and strength of the Bank of Eng- 
land the starting-point in any financial measure, or France in her 
careful adhesion, through every revolution in dynasty or politics, 
to the century-old Bank of France. 

It is also a practical consideration of great weight that any 
change in the existing system would be made with the least 
disturbance of business relations and practices if it were made 
by the better regulation of the mass of banks which already 
have the right of issue; but upon this it is not necessary to 
dwell. 



230 



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THE NATIONAL BANKING SYSTEM 23 1 

The defective adaptation of the national banking system to the 
needs of the different sections is amply shown by the reports of 
the Comptroller of the Currency. From the latest of these 
reports 1 it appears that in 1896 more than two-thirds in number 
of the national banks and more than three-fourths in capital were 
to be found in the belt of states lying north of the Potomac and 
Ohio on the east of the Mississippi, and including Iowa and Min- 
nesota on the west of this river. The same states have more than 
one-third in number and two-fifths in capital of the state banks 
carrying on business without the right of issue ; but the state 
banks, taking these states together, carry on an unequal contest 
with the national system. In the rich states of the North 
the vast preponderance, in number, capital, and business, is with 
the national banks, although, as we advance westward, the newer 
states, even in this belt, show a more equal division of the field. 
Coming to the South and Southwest, excluding Missouri, we 
find the national banks less numerous than the state banks, but 
holding about seven-twelfths of the capital and a slightly larger 
proportion of the deposits. The group made up of Missouri, 
Kansas, Nebraska, and the Dakotas shows a great preponderance 
of state banks in number and deposits and an approach to equality 
in capital. 2 The Central and Mountain states and territories, 
with their extraordinary differences of economic condition, have 
placed the greater part of their small banking capital under the 
national system ; and, finally, the Pacific states show a great pre- 
ponderance of state banking, which upon examination is found to 
be due to the little use made of national banks by California. 

It is clear that the inequalities thus briefly recapitulated rest 
upon something more than mere differences in population, wealth, 

1 See table on page 230. 

In this table the Middle states include Maryland and the District of Columbia; the 
West and Northwest, the states from Ohio to Iowa and Minnesota; the South and 
Southwest, the Atlantic and the Gulf states from Virginia to Texas, with West Virginia, 
Arkansas, Kentucky, and Tennessee ; the Missouri River group is Missouri, Kansas, 
Nebraska, and the Dakotas ; the Pacific states are Nevada, California, Oregon, and 
Washington ; the Central and Mountain group is Colorado, Idaho, Montana, Wyoming, 
Utah, New Mexico, Arizona, Oklahoma, and the Indian Territory. 

2 It should be noted here that in the Comptroller's returns for Kentucky, Kansas, 
Nebraska, and Oklahoma, the figures for state banks include private as well as incorpo- 
rated banks. Of the Kansas banks returned 109 were private, and of those in Ne- 
braska 81, mostly of small capital in each case. 



232 ESSAYS 

and general activity. Those differences would lead us to expect 
much disproportion in the use of banks in general ; but it is plain 
that, in addition to this, the comparative attractions of national 
banking with the right of issue, and of state banking without it, are 
differently estimated in different states and sections. This appears 
still more clearly when a comparison is made between different 
parts of the same section. Thus, in the large Western group, the 
four newer states — Michigan, Wisconsin, Iowa, and Minnesota — 
have $36,000,000 of state bank capital to $52,000,000 of national, 
in this respect approximating the condition of sparsely settled agri- 
cultural states in other sections. In the South, of the most impor- 
tant banking states, the Virginias and Kentucky have $32,000,000 
of state bank capital to $21,000,000 of national. In general, the 
rule holds that the older, richer, or more densely populated states, 
with varied industries, find it easier to use the national system than 
the more thinly settled communities, poor in capital and carrying 
on industries of slow return. Even such an apparent exception as 
that of Texas, where only the national system appears to be used, 
proves the rule ; for Texas, since 1876, has forbidden by her consti- 
tution the establishment of state banks, and any competition with 
national banks must there be carried on by private bankers. 

It is beyond dispute that one of the most serious difficulties in 
the use of the national system in the newer or poorer communi- 
ties is the requirement of an investment in United States bonds, 
locking up banking capital in a non-banking security, returning 
less than three per cent to the holder. In the older states, with 
abundance of capital and low rates of profit, this requirement has 
less importance ; but in states where the conditions are reversed 
it is a heavy block in the way of the national system and its possi- 
ble usefulness. Especially does the bond deposit block the way 
in any section where there is a need of banks of relatively small 
capital; for, as the minimum holding of bonds is one-fourth of 
the capital for banks of $150,000 or under, and $50,000 for larger 
banks of whatever size, it bears most heavily in proportion upon 
the small capitals. The comparative pressure of this requirement 
in different sections, in October, 1896, is shown by the Comptroller 
of the Currency, 1 in a table from which the following statement 
is made up : — 

1 Report for 1896, p. 552. 



THE NATIONAL BANKING SYSTEM 233 



New England . . 
Middle States . . 
West and Northwest 
South and Southwest 
Missouri River . . 
Central and Mountain 
Pacific .... 



Bonds held 
for Circulation 

65.4 
87.9 


Minimum 
Required 

21.6 

28.9 


Percentage 
of Excess 

.67 

.67 


45.6 


24.9 




•45 


21.3 


14.2 




•33 


9.2 


7-i 




• 2 3 


3-9 


2.9 




.29 


3-9 


3- 




.24 



237.2 102.6 

The reluctance with which the investment in bonds is made by 
small banks in the agricultural states is also shown with great 
distinctness by the case of Texas, where vigorous growth calls 
for extended banking, but only national banks can obtain charters. 
Of the 207 national banks in Texas, 88 are banks of $50,000 
capital, of which 86 have the exact minimum of bonds, 1 a nomi- 
nal excess, and 1 a circulation equal to its capital. Of the 76 
banks above $50,000 and not over $100,000, 63 have only the 
exact minimum, 7 only a nominal excess, and 6 have together 
$182,250 above the minimum. Of the 43 banks having capitals 
above $100,000, 36 have the exact minimum of bonds, 3 have only 
a nominal excess, and 4 have together $208,000 in excess of the 
requirement. For the whole $20,920,000 of national bank capital 
in Texas, the bonds held for circulation above the legally possible 
minimum is but $434,700. The inference from these figures is 
irresistible that banks in Texas cannot afford to invest at the low 
rate of interest yielded by United States bonds, and the presump- 
tion is strong that the increase of small banks is hindered and 
that capital is forced into other channels by the bond requirement. 
Nebraska is also a strong case of the same kind, with the differ- 
ence that Nebraska seeks her relief by means of incorporated state 
banks. The 11.3 national banks in Nebraska, having an aggre- 
gate capital of $10,975,000, hold only $368,650 of bonds in excess 
of the required amount; and $333,000 of this excess is held by 
the large banks in the cities of Lincoln and Omaha. Out of 72 
banks of $50,000 capital, only 3 hold bonds exceeding the mini- 
mum by so much as $1000, and 64 hold no excess whatever. 
Similar illustrations of the working of the bond requirement may 
be found in many other states. 

Of the objects to be gained from the deposit of bonds, — 



234 ESSAYS 

security for the notes and the creation of a market for bonds, — 
the former alone now has any value. Against the complete at- 
tainment of this object, which must be admitted, have to be set 
the facts that, as the government credit rises, the inducement to 
take out circulation weakens, so that the strength of the security 
tends to pinch the issue out of existence, and that the necessity of 
giving this particular kind of security produces the maximum of 
discouragement in sections where the need of banking facilities 
is strongly felt. The propositions to permit notes to be issued to 
the par of the bonds, instead of the ninety per cent so far allowed, 
and to moderate or withdraw the one per cent tax on circulation, are 
offered as palliatives for an acknowledged evil ; but they do not 
strike at the cause, nor, as will be seen, can they have any effect 
upon some of the more serious difficulties of the system. The 
root of the trouble is, after all, the necessity for taking a relatively 
large part of the capital of a bank out of the proper business of 
banking, and investing it elsewhere, when all that the bank can 
do by means of its capital and credit combined is needed for 
the accommodation of its customers. A complete remedy would 
have to start therefore, as was proposed by the American Bank- 
ers' Association in 1894 1 in the well-known "Baltimore Plan," 
with the abolition of the bond deposit and the restoration of the 
note to its natural relation, as an exercise of credit in the business 
of banking. If to this were added provisions for the security of 
the note-holder by a first lien on the assets of the bank, and, as 
was also proposed in the Baltimore Plan, by a guarantee or safety 
fund supported by the contributions of the issuing banks, both 
reason and experience show that the strength of the note would 
be ample. Some other parts of the present system would no 
doubt need revision. Provision for more thorough inspection 
than is possible with the present staff, more frequent publication 
of accounts, and strengthening of the stockholder's liability, not 
in its nominal extent, but in its binding effect, 2 are changes already 
needed, which would then be seen to be imperative. 

1 For the details of the " Baltimore Plan " see White's " Money and Banking," p. 458; 
Journal of Political Economy, December, 1894, p. 101. 

2 Prior to 1 880 only about thirty-five per cent of assessments upon stockholders of 
insolvent banks was actually collected ; and in the finished cases since 1880, reported 
in the Comptroller's Report for 1896 (Table No. 76), it appears that the collections 
averaged only fifty-two per cent. 



THE NATIONAL BANKING SYSTEM 235 

Amended by resting the issues of national banks upon their 
assets, where the business community are willing to let the 
#1,600,000,000 of deposits rest, the system would be freed from 
one of the burdens which hinder its progress in the South and 
West. It would still find its growth seriously hampered in 
sparsely settled districts everywhere, by the inability of a small 
community either to provide the capital or to supply the business 
for banks of the size required by the present law. On this sub- 
ject a flood of light is thrown by Mr. Thornton Cooke, in a 
paper 1 showing the distribution of small banks in Missouri, 
Kansas, Nebraska, and the Dakotas. In these states the mini- 
mum capital required for state banks is #10,000 in Missouri 
and #5000 in the four other states. Whatever this minuteness 
of capital may show as to the prudence of the legislation, it 
proves that in this important block of states the need of diffu- 
sion is keenly felt ; and the same inference is to be drawn from 
the minimum of #15,000 required in Michigan and #10,000 in 
Minnesota. In the five states dealt with by Mr. Cooke an ex- 
traordinary development has taken place. Of 1247 state banks 
covered by the latest official returns, and excluding private banks, 
1 1 58 are not beyond the #50,000 line of capital, 451 are not 
beyond the line of #10,000, and 112 have capitals not exceeding 
#5000. The tables make it plain that in these states, as a whole, 
there has been a strong movement to provide for needs not now 
covered by the national system. There is a long list of other 
states in which, upon examination, we should find proof of de- 
mands not satisfied by the national system, but met imperfectly 
by state banks and by the great number of private banks, of whose 
operations there is no record even approximately complete. In 
every other important banking country such a demonstrated 
need as this for diffused but sound banking would be answered 
by the establishment of branches or agencies of banks of larger 
capital. This method is not unknown in the United States, al- 
though for various reasons its application for many years past 
has been confined to a few states and has been on a limited scale. 
That it is less applicable or hopeful here than in all the other 
English-speaking countries, or that it needs anything more than 
proper encouragement for its wide introduction, at least in sections 

1 See Appendix, Quarterly Journal of -Economics, October, 1897. 



236 ESSAYS 

like the South and West, it is hard to believe. The change re- 
quired in the present law would be slight. If no use were made 
of the liberty to establish branches, the national system would 
simply stand as at present, if not improved, at least not impaired ; 
and, if use were made of the liberty, one of the two barriers which 
bar the access of national banks to an important field would have 
ceased to block the way. 1 

It has also been proposed, as a partial remedy for the imperfect 
distribution of banking under the national system, to reduce the 
minimum required capital to $25,000, as it stands in the law of 
New York and of several other states. 2 This proposition, how- 
ever, is open to some serious objections. It plainly does not go 
far enough to reach the seat of a great part of the evil. Taking 
for illustration the case of the Missouri and Dakota group already 
referred to, it appears from Mr. Cooke's tables that little over one- 
third of the state banks in that group have capitals above $20,000. 
The fact appears to be that banks of $25,000 capital would be 
almost as completely beyond the means of a majority of the small 
village centres in sparsely settled districts as banks of $50,000 are 
now. But, even if such a reduction of required capital were 
enough to lead to an important extension of the national system, it 
is also a serious question whether on other grounds this would not 
be a move in the wrong direction. As national banks multiply in 
number, the problem of insuring sound management by effective 
supervision becomes grave. With not far from thirty-seven hun- 
dred banks already in operation, the United States evidently have 
in hand a task such as no government ever before undertook ; and 
the difficulties of this task would increase with the further pulveri- 
zation of capital now suggested. The records of failures show that 
even in large banks the close attention of directors is not always 
easily had ; but with banks of the smallest class in small villages, 
not only is there increased difficulty in making it worth the while 
of directors to give the requisite attention and thought to what is, 
after all, a matter of but trifling importance to any one individual, 
but there is also the often experienced embarrassment in finding 

1 The present Comptroller of Currency has urged the introduction of the branch 
system in his Report for 1896, p. 102 ; and the same ground was taken by Secretary 
Carlisle, Finance Report, 1895, P* l xxx i v « 

2 For this also see Report of the Comptroller of the Currency, 1896, p. 102. 



THE NATIONAL BANKING SYSTEM 237 

among the business men of a village the material for making up 
a competent board. The best promise of good management is 
afforded by a bank with an immediate constituency large enough 
to supply an ample choice of men, and with a capital large enough 
to secure the pressure of a full sense of responsibility, and to 
demand a reasonable share of time and care from an unpaid body 
of men. In short, any change in capital should be in the direction 
of consolidation rather than subdivision. The smallest class of 
national banks now in existence should shrink, and the extension 
of the system should be effected by banks of more considerable 
capital, if we are to move towards the most efficient and safe 
organization. As for the suggestion that such a movement would 
mean diminished competition and the " concentration of the 
money power," a system of thirty-seven hundred members would 
afford ample scope for healthy consolidation long before the 
danger point could come into view. As for any risk of monopoly, 
if the power of establishing branches were restricted within state 
lines, every state would be likely to find within its borders suffi- 
cient competition among its own banks to give its people the full 
benefit of diffused accommodation, free from external control or 
internal combination. 

So far our discussion has turned chiefly upon the present 
inability of the national banking system to develop banking in ac- 
cordance with pressing needs of important sections of the country. 
The further objection that the system is not so constituted as to 
supply an elastic currency points to a defect in the working of the 
bank circulation in every section. This objection is indisputable, if 
we give to the word " elasticity " the meaning usually given to it in 
banking discussions. If by elasticity we are to understand nothing 
more than mere capacity for growth under favoring conditions, or 
variability, no doubt the bank circulation has varied and has had 
its periods of growth. It rose rapidly in its earlier period, when 
the investment in bonds yielded a high return ; it ran down for a 
long series of years as the return upon bonds declined ; and it 
rose again after the revulsion of 1893, when with the decline of 
bonds the return upon them advanced. But the elasticity of a 
currency is understood to mean something quite different from 
this tendency to vary over long periods. It means responsiveness 
to present increase or diminution of demand, — the power of 



238 ESSAYS 

adaptation to the needs of the month, the week, or the day, 
whether rising or falling. A glance at the figures for any series 
of years, or for any period of marked change in affairs, shows that 
the national bank circulation has never had this quality. How 
should it be elastic ? Elasticity implies the operation of counter 
forces, in a currency as well as in a steel spring. That a currency 
may be responsive to demand, it is necessary that the forces, tend- 
ing respectively to expand or to restrict, should be forces at work 
in the daily business of the bank, where it is brought into contact 
with the community by the stream of loans, deposits, and pay- 
ments. But under the national system at present the motives for 
extending issues are completely separated from real banking con- 
siderations, and such tendencies for the return of notes as exist 
are equally foreign to the relations between the issuing bank and 
that portion of the public which it serves. 

The failure of the national system to provide for a return flow of 
notes by some effective plan of redemption is no doubt due to the 
circumstances under which the national bank acts were passed. 
Looking to a distant future, the acts contemplated an ultimate 
return to specie payment, and some of their provisions were 
shaped accordingly. But, after all, Congress was not greatly 
interested in any present requirement of redemption, when, so 
far as could be seen, the redemption of a note must for years mean 
no more than its exchange for another piece of paper, itself irre- 
deemable. To tie the bank circulation to the public debt, and 
thus to secure for it as good a chance of ultimate solvency as a 
promise by the government could then have, and to give the bank 
paper universal credit, were immediately attainable results, beyond 
which there was not felt to be much necessity for looking. The 
act of 1863 accordingly made no provision for the ordinary re- 
demption of bank-notes anywhere except at the counter of the 
bank itself; and the chance of presentation there was obviously 
so slight, that Mr. Sherman cheerfully assured the Senate that 
" these notes, all being the same," so far from having a pitiful life 
of thirty or sixty days, "may have an indefinite circulation, and 
the average may extend to years." * It was clearly the expectation 
that the notes, when once set afloat, would drift on the ocean of 

1 Cong. Globe, February 10, 1863, p. 843. Mr. Baker of New York, in the House, 
insisted upon the need of central redemption. Ibid., February 20, p. 1141. 



THE NATIONAL BANKING SYSTEM 239 

paper as long as their material could hold together. The amended 
act of 1864 added the requirement that every bank outside of the 
redemption cities should redeem its notes through some bank in 
one of those cities, and that all banks in other redemption cities 
should redeem their notes through banks in the city of New York ; 
but, in the absence of any motive for demanding the redemption 
of notes which every holder, whether a bank or an individual, 
could use in his own payments, these provisions served only as a 
reason for allowing banks to reckon as a part of their reserve the 
funds deposited by them with banks acting as their redeeming 
agents. 

This inadequate arrangement did not satisfy the conservative 
banking opinion of the country; and in 1865 and 1866 an impor- 
tant movement for establishing assorting houses in the chief finan- 
cial centres, with central redemption, was organized in New York, 
Boston, and Philadelphia, with the approval of the Secretary of 
the Treasury and the Comptroller of the Currency. 1 The ele- 
ments of opposition, however, were too strong. The project lost 
its strength, and died ; and the opportunity was lost. The 
national bank system grew up with an apparatus of redemption 
which did everything but redeem ; and no change was made until 
1874, when the function of redemption was transferred to the 
Treasury, and banks were even forbidden by law to redeem any- 
where else, except at their own counters. Thus we have to-day 
a system of so-called redemption, which no doubt removes from 
circulation notes which for sanitary reasons, or from wear and 
tear, are unfit for further use, and enables banks which are over- 
loaded with bank-notes at any season to convert them into green- 
backs ; but, plainly, the redemption thus carried on has little 
more than an accidental connection with the financial condition 
of any issuing bank. A large amount of notes may be passing 
through the Redemption Bureau; but the National Bank of X 
has jio reason to look for any unusual return of its notes, however 
extreme its expansion may be, for the holder of its notes, what- 
ever the amount of its obligations, will sooner use them in pay- 

1 For the action of the banks engaged in this movement, and for Secretary McCul- 
loch's part in it, see Bankers Magazine, 1865-1866, pp. 193, 401, 415. For the views of 
the Comptroller of the Currency, Report, 1865 (for Mr. Clarke's) and (for Mr. Hurl- 
burd's) 1866 to 1870. 



240 ESSAYS 

ments than waste time by sending them to the Treasury. This 
is not a kind of redemption which can possibly make the bank 
circulation responsive to the demands of business, whatever else 
it may accomplish. 

The singular futility of all this part of our legislation is no 
doubt closely connected with the ideas as to the meaning of note 
redemption in general, which have grown up in connection with 
the greenbacks. Even before the act of 1878 ordered the reissue 
of the redeemed greenbacks, the original idea of redemption as 
the fulfilment and ending of a contract had been obscured. That, 
as a matter of legal interpretation, a note " retired and cancelled " 
had been paid, and that any new issue must be a new debt, re- 
quiring clear legal authority for incurring it, had been disputed 
for more than ten years, 1 until something more than the mere 
interpretation of a statute had come into the question. From 1866 
to 1878 there is shown in the debates and the acts of Congress a 
progressive weakening of the force assigned to the term " redemp- 
tion," and the growth of an opinion that everything needful is 
accomplished, if the opportunity for an exchange of one kind of 
currency for another is somewhere held open. 

But is it enough that every holder -of government or bank 
notes should understand that gold can always be had for the 
paper at the Treasury or the bank ? Especially as regards bank- 
notes, can redemption do its work if it is merely a passive arrange- 
ment for possible payment, in case anybody thinks it worth while 
to call for it, and not an active system of prompt presentation ? 
At the bottom of much that is said and written on this subject 
there would seem to be an impression that to give the public 
convincing assurance of convertibility is the only object to be 
provided for. But the redemption of a currency has a bearing 
much broader than this. The exchange of notes for specie on 
any large scale is called for in most cases because the trade rela- 
tions of the country or the section concerned are such as to make 
specie for the time its cheapest export. This state of things may 

1 In January, 1868, Mr. Edmunds stated in the Senate his opinion that the notes 
"retired and cancelled" under the act of 1866 could be reissued, and moved an amend- 
ment to a pending bill to prevent this. Mr. Sherman objected that reissue was illegal 
and further legislation on the point needless, and Mr. Edmund's amendment was lost. 
Cong. Globe, January 10, 1868, pp. 435, 529. Six years later $26,000,000 of notes once 
" retired and cancelled " were reissued. 



THE NATIONAL BANKING SYSTEM 241 

be the result of deplorable misfortune or of equally deplorable 
folly ; but in either case it is the misfortune or the folly that is 
to be deplored, and not the process by which we pay in the easiest 
way the debts which have been created. The payment is, after 
all, a curative process, by which our currency seeks the condition 
of equilibrium with our real ability to hold money, as the first step 
towards sound strength ; and it is for the general interest that the 
movement of specie should be easy, and that the payment of our 
debts, in this form as well as any other, should be prompt. 

Moreover, whether we look at the government issue or at that 
of the banks, it is important that the natural effect of a depletion 
of our currency by specie export should not, under ordinary cir- 
cumstances, be thwarted or warded off. In the one case, for the 
government to undertake, by the reissue of its notes, to keep up 
the domestic currency in the face of a movement for redemption 
and specie export, is to make that currency, so far as may be 
possible, insensitive to the influences which tend to its final re- 
plenishment. Mr. Sherman perhaps had a vision of this truth 
when he recommended "that by law the resumption fund be 
specifically defined and set apart for the redemption of United 
States notes, and that the notes redeemed shall only be issued in 
exchange for or purchase of coin or bullion." 1 No doubt such an 
arrangement, so long as Congress permitted its existence, would 
at any rate have insured the close reciprocal relation which any 
effective redemption of greenbacks should have with the active 
currency, and would have made the position of the Treasury 
defensible without the alternation of panic and loan which has 
been witnessed since 1893. In the other case, it is almost equally 
important that, so far as an export movement of specie draws from 
the bank-note circulation, it should draw as directly as possible 
from the particular banks which are in a state of relative expan- 
sion. The drain of specie is presumably not the consequence of 
any equally distributed imprudence or any level stroke of misfor- 
tune ; and its effect should fall, both by the rule of right and by 
that of expediency, upon some more heavily than upon others. 
This can only be secured by providing for an easy, automatic 
return of notes, so that expanded liability shall, so far as is 
humanly possible, be followed by increased demand for payment. 

1 Finance Report, 1879, p. x. 



242 ESSAYS 

With the imperfect conception of redemption in general on 
which our law proceeds, it is not surprising that the national-bank 
note, when once issued, should be regarded as a liability of indefi- 
nite date, differing from other bank liabilities in this, that the 
issuing bank hardly need trouble itself as to its discharge. The 
fact that it has thus become something not far different from a 
permanent obligation, is no doubt one of the grounds for the idea 
of unjust privilege which so many of our people connect with the 
national bank system. It is also singularly at variance with the 
principle of having a wholesome restraint upon the operations of 
each bank by itself, which governs our treatment of other demand 
liabilities. Provision for the systematic return of notes by other 
banks, like the daily collection of checks, is so contrary to our 
present established habits of thought that it seems abnormal, in- 
consistent with full credit, and useless, if not hostile. But, not to 
dwell upon other considerations, it appears too plain to require 
demonstration that a regular return flow of notes is the necessary 
condition of the elasticity which is now commonly demanded for 
our bank currency. Elasticity cannot be secured without the 
operation of restrictive force upon an outstanding circulation : re- 
strictive force cannot operate there, except through the agency of 
the holders of the notes ; and it can only operate through them by 
virtue of some legal provision or of some convention or practice 
having equivalent force. Of legal provisions for this end a striking 
example is supplied by the law of Massachusetts, which from 1843 
forbade any bank to pay out any notes except its own, and thus 
made it necessary that notes received on deposit or in payments 
should be sent to the issuing banks for redemption. Of a practice 
equivalent in effect to this, there is the equally striking case of the 
Canadian banks, which, without any requirement of law, but simply 
as competitors for business, " demand prompt and daily redemption 
of all the notes of other banks that have come in." 1 But our sys- 
tem presents nothing analogous to these devices for making the 
self-interest of the banks the restrictive force needed to secure 
elasticity of issue. 2 We appear to rely vaguely upon some sup- 

1 Breckinridge states that the average life of a bank-note in Canada is found to be 
about four weeks. " Canadian Banking System," p. 407. 

2 Breckinridge gives {ibid., p. 408) a diagram showing the monthly variation of 
the issues of the Canadian banks for fifteen years. The minimum is usually reached in 



THE NATIONAL BANKING SYSTEM 243 

posed slowly acting tendency of the public to free itself by some 
means of a currency, if felt to be excessive ; but we set no machin- 
ery in motion for that purpose, and do not make it for the interest 
of anybody in particular to do that which on general grounds may 
be desirable for all. Even so radical a scheme of reform as the 
" Baltimore Plan " contents itself with the existing provisions for 
redemption. 

It is obvious that the practical difficulties of redemption have 
multiplied with the growth of our system. Methods easily estab- 
lished at the start would be difficult of introduction into a mass of 
nearly thirty-seven hundred national banks. Still, unless we are 
prepared to surrender the idea of true elasticity, the means must 
finally be devised for making the bank-note as well as the check 
present itself systematically and promptly for payment ; and it is 
highly improbable that this can be done without restricting the 
right of national banks to pay out other notes than their own. It 
is conceivable, although unlikely, that competition might set in 
among the banks of a single state, and prompt them to refuse of 
their own accord to circulate each other's notes, although a result 
like this — easy to understand in a system of only thirty-nine banks, 
like the Canadian — would be hard to reach in states which count 
their national banks by hundreds. But outside of its own state, 
and probably within it, the circulation of a bank-note would have 
to end by law with its receipt in payment or on deposit by a na- 
tional bank, and its return for redemption would have to follow. 

Probably the mere administrative difficulties in the way of an 
effective system of real general redemption would not be found to 
be so serious as they might appear at first blush. For the most 
part the reserve cities, formerly known as redemption cities, would 
be the natural centres of redemption, at which the banks would 
clear their notes with each other as they now clear their checks in 
a clearing-house ; and the two operations would be likely to be 

June, but sometimes in August, and one year in September; and the maximum is always 
near the beginning of November. From the lowest point to the highest, the average 
annual rise, which disappears in January, is about twenty per cent., varying in the last 
dozen years from under thirteen per cent in 1882 to twenty four per cent, in 1888. 
There is also a small rise in the spring, nearly always at the beginning of April, but 
occasionally a month earlier, trifling in amount, but singularly constant, and showing a 
remarkably close correspondence between the notes in circulation and some regularly 
recurring condition of business. 



244 ESSAYS 

carried on under the same roof. The reserve cities would neces- 
sarily exchange with each other, possibly at a common centre ; and 
thus, the country being districted, presumably with reference to the 
natural course of commercial payments, notes paid in or deposited 
at any point would find their way back to the issuing bank, through 
the same channels in which the streams of other liabilities flow back 
upon the debtor banks, and without more difficulty. No change in 
the present uniformity of design of the national-bank notes would 
be required. Distinctive marks to determine the redemption dis- 
trict in which a note belongs, and possibly its state also, could be 
as easily stamped upon it as the charter number of the bank is now, 
and would be all that is required for instant recognition. More- 
over, the labor of assorting the notes, with a redemption system 
once fairly in operation, is not to be inferred from the present con- 
dition of the bank circulation. We now see a confused mass of 
notes on which no regularly acting agency of this sort has been at 
work; but, with an established compulsory return of notes, the 
bank circulation of every part of the country would tend to be that 
of the local banks. Notes might still stray widely, for uniformity 
of system and design would give them the same ease of movement 
among individuals as at present ; but the proportion thus carried 
to a distance would not be great, and their wanderings would not 
be of long duration. The whole circulation would probably be so 
far localized that the chief labor in every redemption centre would 
be to assort the notes issued in its own district and cleared by the 
local banks; and this would simplify and lighten a task which, 
however formidable, would not be too great to be undertaken in 
view of the object to be secured. 

Returning now to more general considerations, the limitation of 
the field of circulation to be expected from a system of actual re- 
demption deserves a little further notice. Existing banks of rela- 
tively large circulation might naturally dislike exclusion from the 
wide area in which their issues now find their chance of long life. 
So far as their gain from circulation comes from the supply of 
currency for use in remote sections or those ill provided with bank- 
ing facilities, they could not be expected to welcome a proposition 
to confine them in effect to their home districts. But, besides the 
general equity of an arrangement which would call upon any bank 
to find its chief field for note issue in the community with which it 



THE NATIONAL BANKING SYSTEM 245 

has its closest relations, it is of special importance for the better 
distribution of banking in the United States that the opportunity 
as well as the legal right of note issue should be more widely ex- 
tended. The sections which now find the national system insuffi- 
cient are those in which the sparseness of population and other 
industrial conditions invite the use of bank-notes and limit the use 
of bank credit in other forms. The local banks require the sup- 
port to be obtained from circulation, and it is desirable as well as 
equitable that they should be able to rely upon the support afforded 
in their own neighborhood. A sense that the home field belongs 
first to the home banks has shown itself in the demand for the 
relief of state banks by the repeal of the ten per cent tax ; and this 
feeling is too well grounded to be disregarded with safety. Cer- 
tainly, if the national system is to be extended and popularized, it 
will be necessary that in this respect the local banks should be 
made as far as possible the natural sources of supply for their own 
constituencies. 

Whether the sections which are now deficient in banks of issue 
would find their currency in actual use greatly increased under the 
changed conditions here suggested may be doubted. They are, 
as a rule, in debt, — rich in possibilities, but poor in actual accumu- 
lation. National banking with general redemption might, at any 
rate, supply them as well as state banking, if the latter were to be 
on the specie basis ; but could they under any system find their 
currency plentiful if it were kept at its specie value ? It is hard 
to see how the regular course of payments, which now takes to the 
commercial centres such coin, legal tender, or bank-notes as they 
acquire, could fail to restrict their note circulation by drawing 
from their banks their cash for remittance. 1 This hardship is the 

1 At a hearing before the House Committee on Banking and Currency, December 
19, 1896, Mr. W. L. Roy all, of Richmond, Virginia, presented his views : — 

" Mr. RoYALL. I say that, if you put out notes in a backwoods community that are 
good at par in New York, those notes will leave the backwoods community, and go to 
New York. . . . 

" Mr. Johnson. Must not those notes suffer a discount when the holders of them 
want to go outside of their own community to make purchases with that money in their 
pockets ? 

" Mr. Royall. No, sir : those notes are payable in coin on demand. They go to 
the bank, and say, ' Give me gold for these notes; ' and they get gold." 

And again, favoring the issue of notes by state banks, — 

" Mr. Royall. If [a bank] issues currency at all, it is for the convenience of the 



246 ESSAYS 

natural consequence of economic conditions which for the present 
keep their demands for certain commodities constantly in advance 
of their means of payment. Nevertheless, good policy and fair 
dealing alike require that whatever opportunity may in fact exist 
for affording either the present or an increased supply of currency 
should be enjoyed first by banks upon the spot. If the lack of 
active circulation remains as at present, the nature of the difficulty 
will at least be clearer than it is now, and will be obviously free 
from the present appearance of unjust discrimination. Moreover, 
to give to local banks all possible encouragement for natural devel- 
opment, by enabling them to use as far as safety will allow the 
power of issue, notoriously needed in immature communities more 
than in the mature, is the readiest way to promote the growth of 
industry and wealth, which will finally raise the people to the con- 
dition where their need of goods for use will no longer keep them 
bare of cash. At present the condition of portions of the South 
and West presents a kind of deadlock. Their people are poor in 
all but natural resources. They remain poor because there is little 
" money in circulation," and there is little " money in circulation " 
because they are poor. With a short succession of bad years they 
are in something like destitution. With a bountiful harvest they 
gain a little ground, and hope rises. To encourage the proper use 
of credit, and of credit in the form most natural to their condition, 
although a slow remedy, appears to be not only a hopeful one, but 
also the only one now within reach of the national government. 

To recapitulate the points which appear to be of chief impor- 
tance in the current discussion : — 

The great objects to be secured are : to enable sections of 
country, now excluded from the advantages of the national bank- 
ing system, altogether or in part, to make use of this system and 
of the right of issue under it, as their needs may require ; and to 
make the issues of the national banks elastic as well as safe. 

The natural means for securing these results are : to abandon 

people who live around it. Yet, if a country bank issues currency backed by the gov- 
ernment, that currency will leave it and the people who really need it, and go to a com- 
mercial centre, where there is no legitimate need for it." 

Mr. Royall's cure for the difficulty appeared to be an issue of notes, not too good, 
but just good enough to be used at home, — a difficult medium to strike. 



THE NATIONAL BANKING SYSTEM 247 

the present system of bond deposit as security for notes, to sub- 
stitute a first lien in favor of note-holders upon all assets and upon 
the stockholders' liability, and to create a guarantee fund supported 
by levy upon all banks in proportion to their circulation; to 
strengthen the system, by provision for closer inspection and by 
more frequent publication of accounts ; to authorize and encourage 
the introduction of the branch system, at the same time raising the 
line of minimum capital, say, to $200,000 ; and to organize a sys- 
tem of central redemption, enforced by restriction upon the right 
of banks to pay out the notes of other banks. 

The practical and political difficulties, at present hindering any 
reform, need no comment. Factions in Congress, apathy produced 
by a new period of prosperity, popular financial delusion, and 
differences of opinion among the friends of reform may raise for- 
midable obstacles in the way even of partial measures, and still 
more in the way of any comprehensive plan, for the removal of 
generally acknowledged evils. But, whatever steps it may be 
possible to take, little will be gained if they do not turn plainly 
towards the objects above stated, and proceed courageously and 
unequivocally upon the general lines which the present writer, 
following many others, has reviewed in these pages. 



CAN WE KEEP A GOLD CURRENCY? 1 

No previous year in our history has seen such an increase of 
the stock of gold in the United States as that which marks 1898. 
Our product for the year is believed to have exceeded that of the 
richest period of the California discoveries, our imports surpassed 
by fifty per cent the highest sum ever before reported by our cus- 
toms records, and these enormous receipts were offset only to an 
unimportant extent by exports. Looking at the influx from 
abroad, it is safe to say that no commercial nation has ever before 
received such a mass of gold in a single twelvemonth for the 
supply of its own requirements. Taking our mining product and 
imports together, our total receipts in 1898 exceeded even those 
of England, the great distributing reservoir of gold, which also 
then reached their highest point. 

Although the course of trade which produced this remarkable 
result is sometimes spoken of as if it betokened some radical 
change in our commercial relations, careful examination will show 
it to have been the consequence of precisely the same influences 
as those previously at work in our foreign dealings. Allowing for 
changes wrought by eighteen years of rapid national growth, the 
course of our foreign trade from the fall of 1896 bears a strong 
resemblance to the wonderful tide ending in 1881, which estab- 
lished the permanence of the specie payments, undertaken with 
such doubtful prospect of success at the beginning of 1879. In 
both cases the United States were able to command gold until 
every reserve and depository was overflowing. 

Still, at the bottom of much of the current discussion of finan- 
cial questions, there is often found a doubt, express or implied, as 
to the ability of the people of the United States to maintain a cur- 
rency on the gold standard. This doubt relates to something more 
than our present ability to hold gold, with our paper currency in 
the top-heavy condition to which it has been brought by thirty 

1 Quarterly Journal of Economics, April, 1899. 
248 



CAN WE KEEP A GOLD CURRENCY? 249 

years of haphazard legislation. It involves the much broader 
question whether there is not something in the economic charac- 
teristics or relations of this country, as compared with the other 
great commercial nations, which makes it difficult, perhaps impos- 
sible, for us to retain permanently what might otherwise be 
regarded as our natural proportion of the world's stock of money. 

It is hardly surprising that this doubt should sometimes spring 
up. As no part of our financial system now works according to 
expectation, we have nearly the whole of the export demand for 
gold concentrated upon the Treasury. Any cause which lowers 
the gold balance in the Treasury, whether it be an unusual demand 
for the redemption of notes or a deficiency of revenue, weakens the 
sometimes narrow foundation on which our paper currency stands ; 
and, as there is no provision for systematic repair, the possibility 
of a suspension of gold payments by the government instantly 
comes to mind. For the greater part of the time, in the last eight 
or ten years, the attention of the public has been fixed upon the 
Treasury balance. Any movement in the wrong direction has been 
viewed with alarm, any demand for the redemption of legal tender 
notes has come to be described as a " raid," the export of gold has 
become an event of black significance. The line to be drawn 
between the embarrassments caused by remediable defects of sys- 
tem and those springing from some inherent financial incapacity 
of the nation, is not always made out with ease ; and we can hardly 
wonder, therefore, that the doubt whether, under any arrangement 
of the currency, we can expect to hold our own in the competition 
of international exchanges should sometimes gain ground. It is 
on the fundamental question thus presented that I now propose 
to offer a few considerations. 

The general advantages with which the United States enter 
the field of international trade are manifestly such as to raise a 
strong presumption in favor of our ability to maintain a gold cur- 
rency, if we will, — a presumption to be controlled, if at all, only 
by showing the existence of some highly exceptional disqualifying 
condition. We have a territory of remarkable productive capacity, 
already developed to such a point as to place us in the first rank 
as a producing country. Our people have the qualities needed for 
the most effective use of this source of material wealth, and are 
practically free from the burdens of debt and armaments which 



250 ESSAYS 

fetter the energies of most of our rivals. Our industries are 
varied and highly organized ; our industrial outfit for the produc- 
tion, transportation, and exchange of goods is vast in extent, and 
in many branches of unprecedented excellence ; and our accumu- 
lation of capital has been extraordinary in rapidity and amount, 
as is evidenced, significantly for the present purpose, by the sup- 
ply of gold in our hands, which, by the mode of estimate followed 
by the Treasury, must now largely exceed $900,000,000. To all this 
is to be added the fact that the United States have long been the 
first gold-producing country in the world, and that, if we now take 
the second place, this is not because our own annual supply has 
fallen off, but because that of South Africa has come into existence. 

If now we seek for a possible disqualifying condition, tending 
to defeat the presumption created by these solid advantages, 
original and acquired, we must look for it either in the trade in 
merchandise carried on by this country with others, or in our 
strictly financial transactions with the rest of the world. It is 
only in dealings of these two kinds that we receive gold or part 
with it, on any great scale, and it is therefore in one or the other 
set of relations thus created that any such exceptional character- 
istic as is now sought for must exist. 

Taking into consideration, first, the economic character of our 
exchange of merchandise with other countries, it is clear that, as 
regards the movement of gold, the position of the United States is 
one of singular advantage. This fact we recognize in our confident 
moods, but are inclined to overlook in the presence of any financial 
difficulty. Summarily stated, the advantage consists in this, — that 
our demand for the goods of other nations is, on the whole, far less 
intense than their demand for ours. This is, doubtless, at variance 
with much that is often said as to our tendency to over-importation ; 
but the truth of the statement is demonstrated by well-recognized 
facts, of which the history of 1893 offers a convenient illustration. 

The crisis of that year came on so late in the spring that the 
imports for the fiscal year ending with June show little trace of its 
effects ; and their net amount, $849,800,000, is one of the highest 
then recorded. Under the pressure of the revulsion our imports 
for the next fiscal year, 1893-1894, fell more than $211,000,000. 
A sudden change of that magnitude necessarily implies some ex- 
traordinary alteration of economic conditions, and great individual 



CAN WE KEEP A GOLD CURRENCY? 25 I 

hardship as the result; but it also implies a wide range of adjust- 
able demand, previously satisfied by imported goods. The nature 
of this demand is disclosed by the classification of imports in the 
Treasury returns. Under Class I., articles of food (of which seven- 
eighths were made up by sugar, tea, coffee, and fruits), there was 
an increase of imports in 1 893-1 894, amounting to over $6,000,000 ; 
under Class II., crude materials for domestic industry, there was a 
drop of forty per cent, or nearly $90,000,000; under Class III., 
partially manufactured materials imported for further manufacture, 
there was a fall of thirty-one per cent, or a little more than 
$30,000,000 ; under Class IV., manufactured goods for consumption, 
there was a fall of thirty-five per cent, or $51,000,000 ; and under 
Class V., luxuries, including silks, laces, tobacco, wines, and liquors, 
there was a fall of over thirty-six per cent., or $46,000,000. 

These figures tell a plain story of enforced economy, by which 
a great people, under the pressure of a revulsion, changed for the 
time the scale and the distribution of their demands for consump- 
tion, slackened the productive machinery which supplied some 
great classes of demand, and undertook to live within their present 
available means. So far as our foreign trade was concerned, this 
economy was practised, not, indeed, with ease, but chiefly by cut- 
ting off the superfluities and the dispensable comforts of life and 
the material for their production, without, however, sacrificing the 
articles of necessary consumption, or even " the free breakfast 
table." Under similar pressure in other years the shrinkage of 
our demand has followed a similar course, marking a high degree 
of control on our side of the international trade. 

If we look at the other side of the trade, and examine the 
demands made upon the United States, we find that cotton, bread- 
stuffs, cattle, and provisions made up two-thirds of our domestic 
exports in 1893 and nearly two-thirds in 1894, the total rising from 
$831,000,000 in the former year to $869,000,000 in the latter. In 
neither year were our exports of these leading articles at their 
highest. Our cotton crop fell off in 1893 by more than 2,000,000 
bales, and our yield of wheat fell in 1894 by more than 100,000,000 
bushels. But the foreign demand for these products is plainly not 
a controllable demand in the same sense in which our demand for 
manufactures is controllable. The demand for cotton is as con- 
tinuous as that for any article of consumption can be. Although 



252 ESSAYS 

our exports vary with the abundance of our crop, the purchases of 
Great Britain in a long series of years show great steadiness ; and 
the United States still send to that chief customer as large a pro- 
portion of her annual supply as they did before the Civil War. 
Our cotton, in short, finds its market in bad years as well as in 
good. It supplies the indispensable material for a vast industry, 
which may indeed flag in bad times, but cannot stop. Our exports 
of food, which are now seldom below $300,000,000, swell, of course, 
with any deficiency of crops in Europe. The demand for them is 
imperative within the limits set by other sources of supply, and, 
when strengthened by the deficiency of those sources, is neither to 
be satisfied by a substitute nor to be reduced by economy of con- 
sumption. It may be said, therefore, of our great exports, that the 
demand made upon us for cotton is constant and imperative, and 
that the demand for breadstuffs and provisions, though irregular, 
is always large and often of remarkable intensity. 

The extraordinary movement of gold to this country beginning 
in 1896 is the latest proof of the importance of this characteristic 
of the relative demands of the United States and of the other lead- 
ing commercial nations. Illustrations to the same effect, however, 
can easily be found in the statistics of our foreign trade, all going 
to show that, while, like any rapidly developing nation, we often by 
large imports strain our ability to pay, any severe pinch finds us 
able to forego a large amount of purchases, — which, after all, are 
not for the supply of imperative wants, — and thus to check the 
outflow of gold ; and that, on the other hand, the urgent demands 
made upon us frequently turn the current of gold in our direction 
with amazing force. That these urgent demands are irregular is 
an undeniable drawback to the advantage which we enjoy. Our 
command of the situation, which is now intermittent, might no 
doubt be constant, and the change in the volume of our trade less 
serious, if the need for our products were always felt at its maxi- 
mum by our chief customers. This irregularity, however, is the 
condition annexed to the enjoyment of a resource which has no 
parallel in the commerce of the world. 1 How far it can be thought to 

1 The extent of the irregularity may be seen by the following statement of the per- 
centage ratio of the annual export of breadstuffs, provisions, and food animals compared 
with the mean for the last ten years : — 

1889 1890 1891 1892 1893 '894 1895 l8 9 6 l8 97 l8 9 8 
.69 .91 .84 1.34 1.03 .98 .76 .88 1.05 1.52 



CAN WE KEEP A GOLD CURRENCY? 253 

place us at a disadvantage compared with other countries as regards 
ability to retain a gold currency will be seen more plainly when we 
come to consider the actual movements of gold to and from the 
leading nations respectively. For the present it is enough to point 
out the strong probability that a trade in which we buy for the 
satisfaction of our own secondary wants and sell chiefly to supply 
the primary needs of others, whether the course of this trade be 
uniform or not, gives us a position of exceptional advantage. 
It is at any rate certain that it presents no reason for concluding 
that the United States have any particular incapacity for retaining 
gold. 

Turning now to the other quarter in which any disqualifying 
condition for maintaining a gold currency must be sought, — the 
strictly financial relations of this country with others, — we have to 
deal with a state of things far more complex than that already 
considered, in which misconception is far easier. Extraordinary 
rapidity of development and the possession of resources which 
offer a vast field for investment have made the United States the 
greatest borrower in the modern world. In saying this of our peo- 
ple as a community, the word " borrow " is used in a wide sense, to 
include all the forms in which foreign capital is employed within our 
limits in uses to which domestic capital must otherwise have been ap- 
plied. Whatever form the evidence of the transaction may assume, 
whether it be found in national, state, corporation, or individual 
indebtedness, in the bonds or in the stocks of railways or industrial 
enterprises, or in the private ownership of manufacturing establish- 
ments, — in all these cases and under many other disguises, the 
people of the United States as a whole are employing foreign 
capital in the support of their general system of industry. The 
interest, the dividends, or the current profits, if any, are the reward 
of the lender : the general gain, convenience, and stimulus coming 
from the development of a particular resource or industry, or from 
the more rapid and symmetrical development of our system as a 
whole, inures to the advantage of our own community. Borrowing 
in this sense we have carried on for a century upon an ever 
increasing scale, and shall doubtless long continue to carry on, 
unless we wantonly sacrifice our unexhausted ability for vigorous 
advance. 

As great debtors, in this large sense, the United States have 



254 ESSAYS 

necessarily great payments to be made to their creditors, — to be 
made according to the standard of the commercial world, and 
therefore called, conveniently enough, gold payments. This con- 
sequence of our position as a debtor nation is habitually spoken of 
as a perpetual drain upon our stock of gold and as a necessary 
hindrance to the maintenance of a gold currency. And yet noth- 
ing is more certain than the fact that the interest, dividends, and 
profits upon foreign capital employed in our industries are no more 
a drain upon our gold than any other debts to be paid in the mar- 
kets of the world. They no more require the export of gold than 
a payment for goods or securities ; and even if by their terms the 
payment is to be made, not, we will say, in pounds sterling, but 
specifically in gold coin, neither the obligation nor the mode of its 
execution differs from that of the payments habitually made in 
foreign trade. It is not, even in this case, the actual transporta- 
tion of metal across the Atlantic that is called for, but the payment 
of metal in London, Paris, or Frankfort, the debtor providing the 
means of payment at that place as he finds easiest, — by selling 
American wheat or cattle, or perhaps by a fresh loan. 1 In fact, in 
the actual process of settlement, one international liability is like 
another. They all take their place among the conditions which 
regulate the barter of commodities between nations, stimulating 
sales here and discouraging them there, and thus by their action on 
the relative level of prices requiring habitually only the clearing of 
comparatively moderate balances. " Gold interest " and the like, 
in the settled course of trade, simply call for the regular export of 
a larger amount of salable commodities, the proceeds of which are 
finally converted, in the foreign market, into that medium which 
secures the execution of the contract for foreign interest pay- 
ments. 

Without further exposition of these familiar facts, it is enough 
for the present purpose to point out that, although a systematic 
course of foreign payments on a large scale may have much to do 
with the habitual level of prices in the country making the pay- 
ments, it has no tendency to strip the country of the gold neces- 

1 Thus the Geneva award of 1872 required the payment of $15,500,000 by England 
to the United States "in gold." The gold was paid to the Treasury, but the transfer 
across the Atlantic was made by a shipment of United States bonds which had been called 
for payment. F. W. Hackett, "The Geneva Award Acts," p. 176. 



CAN WE KEEP A GOLD CURRENCY? 255 

sary to carry on its home transactions upon what has become, for 
it, the normal level. It is only when we come to the return of bor- 
rowed capital, or to the transfer in either direction of securities 
which represent debts, that we find in the relations of the borrower 
anything that can be treated as a permanent disturbing element. 
Indeed, the return of borrowed capital, or, in other words, the pay- 
ment of debt, can also be set aside as little likely in practice to be 
the cause of serious disturbance, so steadily is cancelled debt re- 
placed by fresh borrowing. It is the transfer of securities as 
investments or for speculative purposes, sometimes in large masses, 
acting as an unseen import or export, and therefore calling for 
settlement in precisely the same way as a movement of merchan- 
dise, that is most important from the present point of view. It is 
this which, at all events, appears to be the cause of most frequent 
anxiety as to the drain of specie. The possibility that, at some 
moment of stress on one side of the water or the other, stocks and 
bonds to an unknown amount may be launched by London upon 
the New York market, creates a vague apprehension, all the more 
disturbing because the facts involved can never be measured with 
precision. 

No doubt the great class of " international securities," which 
have so important a place in the operations of modern finance, 
while they facilitate settlements and make transactions easy which 
would otherwise be impossible, at the same time often make the 
movements of commerce unsteady, and increase the swiftness and 
intensity of their changes. This, again, is a drawback suffered for 
the sake of great benefits enjoyed, the world being, on the whole, 
immeasurably the gainer. In the use of these securities the United 
States have a leading share, not only because of the extent of their 
general dealings, but because so large an amount of the securities 
are issued and domiciled in this country, and so find a natural 
market here. It is not probable, however, that, either in the gen- 
eral trade of the world, or in our particular trade, the movements 
of gold have been increased by the dealings in this kind of prop- 
erty. On the contrary, it is more probable that, like any other 
improvement which introduces new varieties of desirable exports, 
the increased movement of securities has, on the whole, tended to 
diminish the transfers of gold relatively to the value of goods ex- 
changed, and that this relative diminution has been felt in the 



256 ESSAYS 

trade of the United States, 1 although with our growth the absolute 
amount both of goods and of gold has vastly increased. 

But our present inquiry is whether the dealings in international 
securities make the hold of the United States upon a specie cur- 
rency weaker than that of other countries which successfully 
maintain such a currency. It would be strange if this were the 
case ; for, as they sell what we buy and buy what we sell, any dis- 
turbing tendency felt by us must also be felt by them at some stage 
in the series of operations. London, for example, is a buyer when 
New York sells and a seller when New York buys, having the same 
sensitiveness to an outflow of gold and even greater anxiety as to 
the sufficiency of the export trade to counteract any serious drain. 
If, on the whole, New York is weakened by this class of opera- 
tions, often no doubt highly speculative, is not London also weak- 
ened by a similar process ? Do we, in fact, lose anything in the 
comparison of our position and its advantages with those of the 
country which for nearly eighty years has maintained a sound 
specie currency without interruption ? The truth is that on each 
side of the water international securities, when imported, are an 
import of the class not necessary for the satisfaction of any 
imperative want, and are bought therefore because the purchase is 
likely to be profitable, and when exported, are sold, if at all, for 
such price as the purchaser judges to be for his advantage. The 
disadvantage of having them crowded for sale upon the home 
market, so often dwelt upon in discussion in this country, is, at all 
events, slight in comparison with the disadvantage suffered by the 
country which finds itself compelled to make unusual purchases of 
food or of any great staple for manufacture. 

It is convenient, at this point in our discussion, to consider 
briefly the special advantage, as compared with the United States, 

1 In the last five decades the aggregate imports and exports of merchandise by the 
United States, compared with their aggregate import and export of gold, have been as 
follows : — 





Merchandise 


Gold 


Percentage of Gold 
to Merchandise 


1849-1858 . 


. . . $4,621,000,000 


$389,000,000 




.0842 


1859-1868 . 


. . . 5,641,000,000 


704,000,000 




.1248 


1869-1878 . 


. . . IO,Il8,000,000 


530,000,000 




.0524- 


1879-1888 . 


. . . 14,098,000,000 


571,000,000 




.0405 


1889-1898 . 


. . . 16,848,000,000 


1,094,000,000 




.0649 4- 



The exceptional conditions of the second and fifth decades require no comment. 



CAN WE KEEP A GOLD CURRENCY ? 257 

which England is often said to derive from her peculiar position as 
a commercial nation. " England," it is said, " being the great 
creditor country of the world, can draw gold as she pleases from 
any quarter, whereas this is a debtor country, never secure against 
demands from abroad." This idea of the practical command of 
the gold of the world lying in the hands of the great creditor, per- 
haps owes its origin partly to the fact that the commercial relations 
of England make her the agency through which a large part of the 
gold produced by the United States, Australasia, and South Africa 
finds its way into the currency of the world at large, and partly to 
the visible movements of that great financial barometer, the Bank 
of England rate. It is true that her function as the distributer of 
gold does not enable England to retain more than a rather small 
proportion of what comes into her hands. It is also true that the 
sliding scale of discount, by which the Bank of England protects 
its own reserve and is apt to give the signal for the London market 
generally, is a means of defence in no way peculiar to that institu- 
tion. It is used systematically and quite as effectively by the Ger- 
man Reichsbank. The apparent neglect of it by the Bank of 
France is due, partly to the fact that the enormous stock of metal 
in the bank enables it to yield up gold, if need be, to a great 
amount with no sensible inconvenience, and partly to the fact that, 
by charging a premium upon gold, the bank is able to mask its 
defensive policy, and to preserve a generally uniform rate of dis- 
count with little regard to an outflow of money. The English 
method may in fact be seen at work in our own country, in a less 
definite form, but with similar effect, in the changing rates of 
interest prevailing in the great money centres. 1 Nevertheless, the 
facts that the great streams of gold converge in England and 

1 The following extract is from the hearing before the House Committee on Banking 
and Currency, 1897-1898, Hon. C. S. Fairchild being under examination : — 

"Mr. Fairchild [referring to the raising of its rate by the Bank of England]. 
_Now in this country the same thing takes place when a man borrows a million dollars 
to pay a debt abroad. It makes a diminution of the loanable funds, and that of itself 
works an increase in the rate of interest ; and, when that rate of interest becomes large 
enough, the seller of exchange, instead of meeting his remittances by the actual ship- 
ment of gold, finds a cheaper way to meet his bill of exchange. We do not have to 
have any specific measures to clothe banks with specific power to do that. It does 
itself. It is one of the natural laws which works itself out ; and, if we do not put any 
impediment in the way, it will take care of itself. That is my judgment about it. 

"Secretary Gage. I agree with what Mr. Fairchild has said." Report, p. 135. 



258 ESSAYS 

diverge from her, and that the Bank of England conspicuously 
acts with reference to them, are enough to account for the general 
impression that the controlling power is to be found there. 

But, besides these crude conceptions of the practical working 
of English commerce, there is something more implied in the 
common idea of England as "a creditor country." A creditor 
can call for the payment of debts due to him, and can require 
payment in money. Cannot England, then, call in her dues in 
gold, the world's money ? Of the fallacies involved in this argu- 
mentative question, let us consider the fallacy of personifying 
England, — of saying " England " when we really mean " some 
Englishmen." By a figure of speech the country is presented to 
the mind as a community having a single directing will, a single 
interest and determining purpose, extending credit or collecting 
debts from definitely formed policy, and capable of saying to itself 
upon occasion that gold, and not commodities, must now be secured 
in payment. This might be true, in a degree, if the English polity 
were communistic, and if a committee directed the operations of 
the banks, the commerce, and the manufactures of England, and 
made provision for her daily consumption. But the real case to 
be kept in mind is that in which, instead of a single conscious will 
governing her action, there are some millions of individual wills, 
each determining within its own sphere ; and, instead of a single 
clear line of chosen policy, there is only the confused outcome of 
the varying interests and needs of vast numbers of men. 

In this, the actual state of things, the demand of one class of 
the population for cotton to spin, and the demand of others for 
wheat or for beef, are not and cannot be subordinated to the desire 
which any set of men or of institutions may feel to see gold flow 
in. On the contrary, the requirements for consumption, deter- 
mined by the occupations and relations of a great people, are funda- 
mental conditions, to which financial interests and policies, under 
whatever name, must of necessity conform their action. For illus- 
tration we need not go farther back than the great export move- 
ment of 1896, which between August 1 and December 1 brought 
into the United States $74,000,000 of gold, $40,000,000 of it coming 
from England. Although the Bank of England in seven weeks 
raised its rate from two per cent to four, it could not stop the outflow 
which in four months drained one-fourth of its specie from its vaults, 



CAN WE KEEP A GOLD CURRENCY ? 259 

so uncontrollable are the currents which take their rise in the needs 
and habits of a whole people. The great trade movements of a 
country like England can never be concerted or calculated move- 
ments, as the language used about them often seems to imply. 
They are the result of forces quite independent of each other in 
origin and often in strong conflict, which the small fraction of men 
known as the financial world cannot withstand or govern, but which 
they can often turn to account 1 

These considerations — no doubt sufficiently obvious, but often 
neglected — apply to the action of England as a purchaser of 
merchandise from other countries. They also have a close ap- 
plication to her action as a holder of the securities of other coun- 
tries. The class of Englishmen who hold foreign bonds or stocks 
as an investment will, no doubt, act at times under a common im- 
pulse of confidence or distrust, as investors do in our own country. 
This action may seriously disturb the financial relations of their 
own country with others and affect the movement of gold for a 
time, between England and this country, for example, as it has 
been seen to do. This is, of course, to be noted as an element of 
instability in our international finance, which must be recognized, 
although there may be a question whether a set of trade relations, 
which already include many unstable elements, is, in fact, made 
any more unstable by the introduction of another class of variables, 
with its chances of compensatory action. But it concerns us to 
notice that this action of English investors, although the result of 
a common impulse, is no more a concerted action than the move- 
ment in which English mill-owners buy cotton, eagerly or sparingly, 
as the case may be. It is the action of a great body of individuals, 
seeking advantageous employment each for his own capital, en- 
couraged or disheartened by current opinion as to American 
securities, and neither bidding against each other nor selling at a 
loss in order to affect the general money market or turn the stream 
of gold. Even the class of bankers and other temporary holders 
of securities for speculative profit — a class of men as little disposed 

1 How impossible it is even for a syndicate comprising " every banking house and 
every bank in New York City, with important European connections," to control, be- 
yond certain limits of time and favoring circumstances, the course of foreign exchange, 
is well shown by Mr. Noyes in his account of the gold movement in 1895. "Thirty 
Years of American Finance," ch. x. 



260 ESSAYS 

as any to sell their property at a sacrifice — act in the same man- 
ner, according to the dictate of individual interest, and under no 
leadership or control which could justify the conception of concert 
and dangerous singleness of aim, which we have been considering. 

It is perhaps hardly necessary to point out that, when we thus 
take into account the complex influences which must at any given 
time determine the course of dealing between England and other 
countries, gold loses a part of the quality as a guasi-legal tender 
for international trade, sometimes ascribed to it in current dis- 
cussion. As a commodity, in universal demand at some rate or 
other, it can always be used in payment by the debtor nation, if 
offered on terms satisfactory to the creditor nation. But payment 
in gold cannot be required by the latter so long as there is, among 
the millions of its population, any sufficiently large class of wants 
demanding for their satisfaction the merchandise exports or the 
securities of the debtor in preference to money. The legal tender 
law of the place necessarily regulates the mode of payment in 
London, to be observed by each individual debtor ; but, as has 
already been pointed out, it is no part of that law, nor is it a neces- 
sity of the case, that the debtor should have transported his means 
of payment across the Atlantic. 

The conclusions reached by these general considerations are 
greatly strengthened, when we apply to them the test of observed 
facts. England, France, and Germany are the countries upon 
which the United States chiefly draw for gold, and by which the 
United States are most heavily drawn upon, all three success- 
fully maintaining their currencies upon the gold standard. How, 
then, do the actual movements of gold into and out of the 
United States, for a series of years together, compare with similar 
movements as reported by the three countries named ? For the 
purpose of this inquiry the nine calendar years from 1882 to 1890 
are first taken, as making up what can be called a fairly normal 
period. They begin after the close of the great influx of gold which 
insured the success of specie resumption by the United States, and 
they end before the subsequent saturation of our currency with paper 
and silver had caused serious disturbance. They include years of 
great prosperity, and they cover the period of depression following 
the financial crisis of 1884. Both the products and the imports of 
gold by the United States are given, to show our total receipts from 



CAN WE KEEP A GOLD CURRENCY ? 



261 



year to year ; and against them are set our annual gold exports. 
Annual imports and exports of gold are also given for each of the 
other countries, all being stated in dollars for convenient compar- 
ison. 

[In dollars, 00,000 omitted.] 





United States 


England 


France 


Germany 




Prod't 


Imp. 


Exp. 


Imp. 


Exp. 


Imp. 


Exp. 


Imp. 


Exp. 


1882 . 


• • 32,5 


13,4 


38,7 


70, 


58,5 


54,7 


39> x 


6,8 


9,3 X 


1883 . 


• • 30, 


22,1 


6, 


37,7 


34,5 


12,5 


26, 1 


4,9 


10, 1 


1884 


. • 30,8 


28, 


40,9 


52,3 


58,^ 


24,6 


15,8 


4,4 


7,9* 


1885 


. . 31,8 


23,6 


n,4 


6i,3 


58,1 


47, 


38,8 


10,1 


6,4 


1886 


• • 35, 


41,3 


4i,3 


63, 


67,! 1 


5o,4 


38,2 


11,2 


5,5 


1887 


. • 33, 


44,9 


9,i 


48,5 


45,4 


18, 


49,8 a 


13,2 


4, 


1888 


- • • 33,2 


11, 


34,5 


76,9 


72,8 


i9>5 


37,i x 


39,9 


23,9 


1889 


. • 32,8 


12, 


50,9 X 


87,2 


7o,4 


65,2 


25, 


15,7 


12,5 


1890 


. . . 32,8 


20,2 


24,1 


114,8 


69,6 


22,6 


48,3 1 


24,2 


9,9 


Total 


5 . . 291,9 


2 1 6,5 


256,9 


611,7 


534,9 


3H,5 


318,1 


130,4 


89,4 


Avera 


ge. • 32,4 


24, 


28,5 


68, 


59,4 


34,9 


354 1 


14,5 


9,9 



It appears that during these nine years the United States 
parted, on the average, with about one-half of the gold received by 
them from the mines or from abroad, and that England parted with 
seven-eighths of the gold received by her. These two countries, 
the United States as a mining country and England as the great 
commercial centre, acted as the distributers of an immense addition 
annually made to the world's stock of money, each retaining its 
own proportionate share. In this operation, each country was, to 
a great extent, a natural exporter of gold. Neither, in fact, could 
avoid exporting heavily, so long as its trade or its mines brought in 
a supply obviously so far beyond its power of healthy absorption. 
Of the two, it is important to observe, the United States had the 
firmer hold upon gold, so that this country was able to carry on an 
accumulation which it had begun to make in the later years of the 
long suspension, and thus to strengthen steadily the specie basis of 
its paper currency. The annual supply of the United States was 
also the more constant, its minimum being .78 of its average and its 

1 Export exceeds receipt. 



262 ESSAYS 

maximum 1.38, whereas the annual supply of England ranged more 
widely, from .55 to 1.69 of its average. In the year of strongest 
export by the United States, their ratio of export to supply was 
scarcely higher than that of England in her strongest exporting 
year ; and there were two years of the nine in which the United 
States exported less than .12 of their supply, whereas in no year 
did England export less than .60 of hers. Finally, England shows 
two years with an excess of exports over receipts of gold, and only 
one is shown by the United States. 

As for France, her imports and exports of gold during these 
nine years are remarkable for their great amount, for their extreme 
irregularity from year to year, and for their close approach to 
equality, taking the whole period together. Germany also exhibits 
great irregularity of movement, with a constant accumulation in 
progress for all but the earlier years, the amounts actually moved 
being, for the most part, of but moderate importance. 

Without pursuing further the comparisons suggested by this 
table, it is clear that during this period the United States were not 
only relatively, but absolutely, strong in gold, and gave full proof 
of ability to maintain their currency upon this standard, and this 
notwithstanding an infusion of nearly $300,000,000 of legal tender 
silver. But the turning-point was reached by 1890. The accumu- 
lated mass of silver coin, the issue of more legal tender paper for 
the purchase of a vast weight of silver bullion, 1 the gradual conver- 
sion of that bullion into standard dollars, contemplated by the law 
and set in operation, the loss of confidence in the stability of gold 
payments by our government, and our increasing discredit abroad, — 
all combined thenceforward for several years to loosen the hold of 
the United States upon gold. Violent financial revulsion was the 

1 The Secretary of the Treasury said to a committee of the House of Representatives, 
December 16, 1897 : " I have asked a gentleman in New York, . . . who has been Treas- 
urer of the United States, and who has been Assistant Treasurer in New York for many 
years, Mr. Conrad N. Jordan, about this. He is in a position where he watches pretty 
closely the movements of foreign exchange. . . . He says it is the last $200,000,000 
which has put us to the blush all the time, that has been our trouble. If we get rid of 
$200,000,000, and get a sufficient gold reserve, we will not be troubled ; and the country 
will not fear that we are going to break." " Hearings and Arguments before the House 
Committee on Banking and Currency," 1897-1898, p. 23. 

Mr. Jordan's $200,000,000 apparently represented the treasury notes of 1890, 
$114,000,000, and an increase of silver certificates from July, 1890, amounting to about 
$86,000,000 more. 



CAN WE KEEP A GOLD CURRENCY ? 



263 



inevitable result; and, in the eight calendar years from 1891 to 
1898 inclusive, gold moved between this country and Europe in 
heavy surges, as shown in the following table, compiled on the same 
plan as that already given for the years 1 882-1 890 : — 

[In dollars, 00,000 omitted.] 





United States 


England 


France 


Germany 




Prod't 


Imp. 


Exp. 


Imp. 


Exp. 


Imp. 


Exp. 


Imp. 


Exp. 


1891 


• • • 33.2 


45, 


79* 1 * 


147,4 


H7,7 


69,9 


45,4 


52,6 


28,9 


1892 


• • • 33, 


17,5 


76,5 X 


105,1 


72,2 


74,8 


21,5 


42,5 


35,6 


1893 


... 36, 


72,8 


79,8 


120,9 


94,9 


58,9 


22,6 


33,3 


24,2 


1894 


• • • 39,5 


20,6 


101,8! 


134,3 


76,2 


89,1 


20,8 


72,5 


12,7 


1895 


. . . 46,6 


32,5 


104,6! 


175,4 


104,1 


49, 


47,2 


23,2 


19,6 


1896 


• • • 53,i 


104,7 


58,3 


119,2 


146,7! 


58,1 


60, 1 


52,4 


47, 


1897 


• • • 57,4 


34, 


34,3 


146,7 


150, 1 


56,6 


25,4 


36,8 


28,2 


1898 


. . . . [67,5] 


158,2 


16,2 


212,8 


178,1 


38,4 


604 1 






Total 


s . . . 366,3 


485,3 


550,6 


I,l6l,8 


939,9 


494,8 


303,3 






Aver* 


ige. . . 45,8 


60,7 


68,8 


145,2 


H7,5 


61,8 


37,9 







In this table the change wrought in every column by the excep- 
tional year 1898 is so marked that it is worth while to consider the 
facts as they stood at the close of 1897, when the footings were as 
follows : — 

United States England France Germany 





Prod't 


Imp. 


Exp. 


Imp. 


Exp. 


Imp. Exp. 


Imp. Exp. 


7 years 
Average . 


298.8 
42.7 


327.I 
46.7 


534-4 
76.3 


949 
135-6 


761.8 
I08.8 


456.4 242.9 
65.2 34.7 


313.3 I96.2 
44.8 28 



The relation of the United States to the three other commercial 
countries then showed a remarkable change since the period closing 
with 1890. Instead of being the greatest accumulator of gold, this 
country had become the least, and France held the first place. In- 
stead of our supply from all sources being the most constant of all, 
the range between its minimum and maximum was the greatest ; 
and, in years of greatest export, our ratio of export to supply was 
the highest. And yet, taken by itself, the exhibit for the United 

1 Export exceeds receipt. 



264 ESSAYS 

States indicated a far greater power of resistance to a continued 
drain than might be inferred from this comparison with other coun- 
tries. Omitting 1896 and 1897, when the tide had turned again in 
our favor, the five years, 1891-1895, showed a total net loss by the 
United States of scarcely more than $65,000,000; and, even if we 
add to this the estimated amount of gold used in the industrial 
arts, we have an aggregate loss from our stock not exceeding 
$142,000,000 in five years of unexampled disturbance, — a loss 
more than made up by the returning current of the next two years. 1 
After all, in the series of seven years in which our legislation might 
almost be thought to be expressly designed to expel gold from the 
United States, our exports were not quite seven-eighths of our 
receipts from imports and mines. In the same years taken to- 
gether, England also exported nearly in the same proportion, part- 
ing with four-fifths of all her receipts. 

Violent as the changes were in these years, the years of recov- 
ery came with singular promptness. In 1891 and 1892 our exports 
of gold were greater than our receipts ; and yet in 1893 the return- 
ing current gave us a favorable balance for the three years. Both 
1894 and 1895 carried out a balance of gold, but 1896 turned the 
scale in our favor for another three-year period. 1897 practically 
left us in possession of our own product, and then came 1898, with 
such a tide in our favor as to completely distort the comparative 
results of the first seven years of the period. Taking the average 
for the eight years, 1891 to 1898, the United States again appear 
as the greatest accumulator of gold, parting with less than two- 
thirds of their gold receipts, whereas England in the same years 
parted with more than four-fifths of hers. 

How large the accumulated stock of gold in the Treasury, in the 
banks, and in the hands of the public, has become in the twenty 
years since specie payment was resumed, is a question as to which 
the Treasury estimates may at least give us an approximation. 
Starting with an estimate of about $213,000,000 in June, 1878, 

1 The Treasury estimate of the stock of gold coin and bullion in the United States 

gives the following sums : — 

December 31, 1890 $704,100,811 

December 31, 1895 597,927,254 

December 31, 1897 75 2 >3i6,476 

Report of the Treasurer for 1898, p. 1 10. 






CAN WE KEEP A GOLD CURRENCY? 265 

and following month by month, with great minuteness, the coin- 
age and the movements of American coin in and out, the statis- 
ticians of the Treasury gave us in the latter part of 1881 a stock 
of over $500,000,000, and, with occasional relapses, brought the 
estimates to $700,000,000 by 1888, and to $900,000,000 by October, 
1898. The sums are vast, and it has never been easy to account 
for the great amounts which must be supposed to exist outside of 
the visible depositories. Still, the figures, when checked by the 
operations of the mint and by the annual product and movement 
in foreign trade, conform sufficiently well to the rough probabilities 
of the case. They give a solid assurance that, as a support for 
our monetary system, we have a stock of gold sufficient, and suffi- 
ciently nourished by the resources of mining and commerce, to meet 
the needs of a great and growing nation. Actual or probable inad- 
equacy of supply cannot be alleged as a condition operating to our 
injury. 

This, then, is the state of the facts. Our gold is at times 
drawn from us in considerable amounts, which, however, bear but 
a low ratio to our total stock, and are drawn away in no small 
measure by the aid of our own improvident legislation. The 
recovery comes with no great delay, and with extraordinary com- 
pleteness, as the result of economic advantages of which imprudent 
policy may impair, but cannot destroy, the value. No reverse is 
strong enough to wrest our gold currency from us. And yet, 
judging from the past, two or three years may be enough to carry 
us from our present extreme of confidence to the same dread that 
the foundation is slipping from under us, that mastered the public 
mind in 1893 and 1896. We have the material to build a system 
as solid and as calmly enduring as that of England, but our failure 
for twenty years to bring into order our piecemeal legislation 
on this subject has cost hundreds of millions in shattered enter- 
prises and stagnant industry. The foolish boast which some of 
our public men were fond of making a few years ago, that our 
currency system is the best ever known, and indeed perhaps 
perfect, is not current at present. In fact, there are not many 
who do not condemn the system for one reason or another. Still 
there is a perilous delay in the work of reform. 



THE CRISIS OF 1857 1 

Contemporary explanation of the revulsion of 1857 assigned a 
leading place to the course of our foreign trade and directed atten- 
tion to the rapid increase of our importations and to the heavy- 
exports of coin and bullion, made, it was said, to pay for imported 
luxuries purchased under the stimulus of habitual extravagance. 
A more careful examination of the facts, however, does not sup- 
port the conclusion that during the years from 1850, when the 
marked increase of foreign trade began, to the summer of 1857, 
the people of the United States had purchased beyond their means. 
It is true that in the seven years, 18 50- 18 56, imports for domes- 
tic consumption had doubled, the average at the beginning of the 
period being about $150,000,000, and the amount for one of its 
last years rising to nearly $300,000,000. But leaving out of view 
the effect produced upon the valuation by the depreciation of gold 
then in progress, owing to the immense product then coming 
forward from California and Australia, this increase of foreign 
purchases was the natural result of a rapidly increasing ability to 
pay, caused by an unexampled development of domestic resources 
and domestic industry and by the growth of the country in popu- 
lation. This was reflected in a greater volume of exports of mer- 
chandise, which increased from an average of about $132,000,000 
at the beginning to $217,000,000 in the year 1854. In the year 
1856 net imports, i.e. for home consumption, rose to $295,000,000, 
but in the same year exports of merchandise increased in a much 
higher ratio in consequence of an unprecedented export of bread- 
stuffs ; and even in the year ending with June, 1857, when net im- 

1 This and the following paper on the crisis of i860 were clearly not intended by the 
author for publication. With some omissions they are the substance of a series of lectures 
prepared about 1875, which, though it was not his custom, were completely written 
out. They present so clear and comprehensive a narrative of an important period in our 
economic history that it has seemed fitting to include them in the present volume. 

266 



THE CRISIS OF 1857 267 

ports rose to $333,000,000, the highest point they had ever reached, 
exports of merchandise in like manner rose to over $278,000,000. 

This enormous increase in the ability of the country to satisfy 
its demand for foreign productions by the sale of its own great 
staples of trade still left an annual balance, small at the beginning 
of the period, but rising at the close in some years to the neighbor- 
hood of $70,000,000, to be liquidated in some other way. The sum 
of these annual balances for the period 1850-1855 amounted to 
nearly $221,000,000, and to cover this amount there was an addi- 
tional export of coin and bullion amounting to nearly $205,000,000. 
It is no doubt this visible flow of the precious metals which, at the 
time and since, gave the impression of a vastly overdone foreign 
trade, draining our resources and leading us to some inevitable 
catastrophe. But there is plainly nothing in the export of the pre- 
cious metals which should confirm this impression if fairly con- 
sidered. The productive mines of California had made gold one 
of our regular staples of commerce, for which we must seek an 
outlet, as for cotton or for corn, and which would as certainly 
depreciate if it were entirely retained in the country. From the 
year 1849, then, gold became one of our ordinary articles of export, 
and formed a large part in the immense increase of purchasing 
power which led to the rapid growth of our imports. Nor had this 
steady sale of a constantly accruing surplus stock of gold left the 
people of the United States scantily supplied, since it appears that 
there was a steady increase of the stock held in this country, 
roughly estimated for the entire period at $140,000,000. 

1 849-1 857. American gold received at the mint of 

the United States . . . $402,000,000 

1849-1857. Specie and bullion imported . . 50,000,000 

$452,000,000 
1849-1857. Deduct amount exported . . . 312,000,000 

Added to the stock .... $140,000,000 

Reckoning gold then as a domestic product and a legitimate 
and profitable subject of exchange with other nations for their 
products, our total exports for the years 1850-1855 fell short of our 
imports by only $77,000,000; in the year 1856 there was a balance 
of over $12,000,000 in our favor, and in the year ending with June, 



268 ESSAYS 

1857, a balance of but $2,000,000 against us ; so that from 1850 
down to the beginning of the crisis there was an unfavorable 
balance, according to the usual way of estimating the balance of 
trade for the whole period, of only $67,000,000. 

In connection with this comparatively moderate sum, we must 
take into account some things which enter into the real balance 
of trade, which do not appear in the custom-house returns. The 
tonnage of the United States increased by forty per cent during the 
years 1850-185 5, and of the immense foreign trade which had grown 
up, by far the larger part was carried on by American ships and 
with American capital. In some years the trade in foreign ships 
was not much above one-fifth ; even in our trade with England 
two-thirds of the freight was earned by American ships, and it was 
only in our trade with Canada that any considerable amount of 
freighting was so divided as to give to foreign tonnage an approach 
to equality of employment. The freights earned by American 
ships, therefore, and the profit on a large share of foreign trade 
carried on with American capital, must be included as an impor- 
tant addition to the purchasing power of the country. It must 
also be remembered that considerable amounts of capital had been 
borrowed from abroad for purposes of internal improvements, 
especially for the building of railroads, and that this capital, pass- 
ing through the usual channels of exchange, would tend to pro- 
duce a temporary preponderance of imports. Making allowance, 
on the other hand, for the probable undervaluation of imports 
under the purely ad valorem system of the tariff of 1846, which 
would make the real balance against the United States larger than 
that shown by the custom-house returns, it seems certain that the 
apparent balance against the United States for the period 1850-1857 
is fully offset by freights and profits, and that therefore the for- 
eign trade of that period, although large, was not beyond the 
means of the country. Its rapidity of increase, which was also 
thought by many to be alarming, was due to the addition of gold to 
our list of exports, to the immense extension of cotton growing with 
an ever widening market, to the fresh impulse lately given to indus- 
trial interests in all parts of the world by the gold discoveries, and, 
more than all, to the rapid increase of the United States in popu- 
lation, and hence in productive power. 

In conclusion it may be observed that the increase of our for- 






THE CRISIS OF 1857 269 

eign trade was compatible with either safe or unsound develop- 
ment of the country, and in itself affords no clear indication of the 
condition of affairs. If the countries which purchased the bulk of 
our exports were advancing along unhealthy lines, then our pro- 
ducers for those markets were engaged in occupations subject to 
serious check at any moment. Similarly, if our own domestic 
development was in large measure unsound, the increased pur- 
chasing power of the people, which was reflected in greater imports, 
was certain sooner or later to be seriously diminished. 

While for these reasons we may fairly doubt the commonly 
received statement that in the years from 1850 to 1857 the foreign 
imports of the country had risen to a dangerous point, it is 
beyond question that in other respects business affairs exhibited an 
unhealthy expansion, which fully accounts for the state of things 
which followed. Aside from all stimulating influences of a special 
and local character, the people of the United States felt the im- 
pulse given both to production and to speculation in all parts of 
the world by the progressive depreciation of gold. The general 
rise in prices was a new spur to enterprise and a new incentive to 
the anticipation of gains likely to accrue in the future. In spite 
of the partial revulsion of 1854 and 1855, nearly every branch of 
domestic business was driven to the extreme point to which the 
competition of a singularly active and pushing class of men could 
force it, and this process was accompanied by an extension of mer- 
cantile credits in length as well as in amount. For more than a 
generation the temptation to this kind of expansion had been almost 
constantly present in the United States, especially in all branches of 
business connected, even remotely, with the supply of commodities 
in the South and West, — regions poorly supplied with capital, in 
which, either from the prevailing habits of the people or from the 
necessities of a rapid development, the crop of the year was apt to be 
heavily mortgaged for the expenses of its production. The credits 
given to Southern and Western buyers were necessarily long at any 
time, and there is ample evidence that in the few years before 1857 
they had seriously increased, and that the lengthening of the credit 
given to the consumer had brought in its train a longer credit given to 
the merchant who supplied him, a longer credit by the jobber to the 
merchant, and by the manufacturer or commission merchant to the 
jobber, and so on through the whole chain of intermediate dealers 



2;o ESSAYS 

from the consumer to the producer or importer. The terms of 
credit given varied with the branch of trade, but in all the ten- 
dency to longer time was strong. 

This vast mass of credit was managed by means of upwards of 
fourteen hundred banks, with an aggregate capital of $371,000,- 
000, established under the laws of the several states and therefore 
acting under no general superintendence or control. The systems 
of legislation on this subject, adopted by the states, often differed 
from each other radically, and were in many cases inadequate and 
even of questionable soundness ; but nevertheless, the entire paper 
currency of the country for many years had been furnished by 
these banks. Gold was the only legal tender (except for sums 
under $5), and was also the currency of the government, since the 
Treasury of the United States, under the Independent Treasury 
law of 1846, was not permitted either to receive or to pay except 
in coin. For the purpose of everyday life gold was little used by 
the people except in the Southwest and on the Pacific coast ; the 
silver coinage, debased and limited in amount under the act of 
1853, supplied the small change, and bank-notes were the ordi- 
nary currency throughout the greater part of the country. The 
safety and currency of these notes varied as materially as the sys- 
tems on which the banks were established. The New England 
banks had entered into a voluntary combination to secure the daily 
redemption of their circulation, and this, together with the general 
soundness of their assets, maintained their notes in good credit. 
The greater number of the New York banks were established 
under a general law which required a deposit of public stocks with 
the state government as security for the redemption of their cir- 
culation. But this provision for ultimate payment did not answer 
the same purpose as the New England system of securing the 
immediate convertibility of the circulation, and it was accordingly 
only by the voluntary adoption of a similar system that the New 
York banks secured for their currency full confidence. In some 
of the Middle states, and in a large part of the West, the New York 
system of a secured circulation had been adopted, but with great 
looseness of detail, and currency had been poured out based upon 
stocks of uncertain value and without provision for its prompt re- 
demption. In the South, three states, Florida, Arkansas, and Texas, 
forbade the establishment of banks within their limits, others had 



THE CRISIS OF 1857 271 

followed the New York system, while Louisiana, availing herself 
of the peculiar course of Southwestern trade which then made 
New Orleans a natural entrepot for specie, had established her 
banks on a more solid foundation of coin than any others in the 
United States. 

The loans of these banks had been rapidly extended during 
the years 1855 and 1856, except in the Eastern states, where the 
increase had been moderate, and in the aggregate had risen at 
the beginning of 1857 to $684,000,000, an increase of nearly 
twenty per cent. Their deposits had increased in similar 
ratio, and amounted to $230,000,000 ; while their circulation, in- 
creasing more slowly, amounted to $214,000,000. Against this 
immediate liability for deposits and circulation, amounting to 
$445,000,000, the banks held an aggregate of $58,000,000 in 
specie, divided very unequally between the different sections. 1 
Specie holdings were but thirteen per cent of demand liabilities, 
contrasting with nineteen per cent in 1855. The proportion of 
specie, however, was not the measure of the confidence which the 
public felt in the banks of the several sections, for the notes 
of the Eastern banks which were most poorly provided with coin 
enjoyed a wide circulation in the other sections, while those of a 
large part of the banks of the Middle and Western states had 
only a local circulation. And of the whole mass of paper cur- 
rency, we may fairly say that it was for the time, and so long as no 
reverse occurred, practically convertible, and really at a par with 
specie when not too far removed from the place of issue, but that 
the banks were nowhere, except in Louisiana, in a condition to 
resist a long-continued demand for specie. The paper currency 
was then eminently a currency resting upon credit and represented, 

1 The following table, from data collected by the Treasury Department, shows ap- 
proximately the condition of the banks in January, 1857 : — 



~ States 


Specie 


Circulation 


Deposits 


Percentage of 
Liabilities in Specie 


Eastern . . . 


^7,000,000 


$53,000,000 


$35,000,000 


.08J 


Middle . . . 


23,000,000 


62,000,000 


140,000,000 


.II| 


Southern . . . 


7,000,000 


39,000,000 


15,000,000 


.13 


Southwestern . . 


16,000,000 


38,000,000 


26,000,000 


• 2 4f1y 


Western . . . 


5,000,000 


22,000,000 


14,000,000 


•13 



$58,000,000 $214,000,000 $230,000,000 ' x 3iV 



272 ESSAYS 

not so much money, as the believed ability of the banks to ulti- 
mately pay money if required. 1 

The general tendency to expansion by means of credit had 
shown itself also in a marked degree in the development of the 
railway system of the United States. At the beginning of the 
year 1850 the number of miles of railway in the United States 
was but 7355. Under the pressure of urgent need of improved 
means of transportation and the general stimulus to all enterprises 
already referred to, the extension of the roads into districts not yet 
provided and not even settled, was undertaken on a great scale, 
and in January, 1857, the mileage had increased to 24,476 miles. 
That a large part of this increase was in anticipation of the actual 
wants of the country, and to a considerable degree of a speculative 
character, might be inferred from the fact that of the 3400 miles 
built in the year 1856, nearly one-half were in the seven sparsely 
inhabited Northwestern states, even if the notorious embarrass- 
ments of many of the newer roads had not made the fact certain. 
To this rapid investment of capital in a form in which its returns 
must be slow and uncertain, the policy of Congress in making 
liberal grants of public lands in aid of new railways had given no 
small encouragement. It is estimated that by acts of Congress 
from 1850 to August, 1856, upwards of 20,000,000 acres of lands 
were granted as subsidies for the opening of new lines in the West 
and South. That the assistance thus given to the extension of 
railways in advance of population has quickened the growth of 
the states interested and has caused an immense and general in- 
crease of wealth, is beyond any serious question ; but its immediate 
effect was to encourage hazardous undertakings, to lead to the pro- 
jection and opening of many lines of which the chief purpose was 
to secure the land grants for the projector, and to foster specu- 
lation in lands. To what a height this last form of speculation 
had run is apparent from the sudden increase in the receipts of 

1 We have then the following elements entering into the composition of the currency 
of the United States at the beginning of 1857 : — 

Bank-notes $214,778,822 

Bank deposits 230,351,352 

Specie in the Treasury 22,751,476 

Specie in the banks 58,349,838 

Specie in circulation (estimated) . . . 160,000,000 



THE CRISIS OF 1857 273 

the Treasury from the sale of lands, from an average of little over 
$2,000,000 a year to nearly $11,500,000 in the year 1854-1855, and 
nearly $9,000,000 in 185 5-1 856. The railroads had been built, more- 
over, and lands bought, to a great extent, not by the use of funds 
belonging to the projectors and speculators, but by a lavish use of 
credit in the shape of mortgage bonds which offered a form of in- 
vestment attractive in all respects save in security for regular 
returns. A chill came over these enterprises several months 
before the close of 1856, and declining prices marked the general 
diminution of public confidence. Some companies hitherto in good 
credit found their returns insufficient for the payment of their 
interest, the impression gained ground that the calculations on 
which most of the new railroad enterprises were founded were 
extravagant; and finally, when, under a domestic pressure for 
money, and a sudden rise of the rate of discount at the Bank of 
England, the prices of stocks underwent a sharp decline in Sep- 
tember and October, 1856, the markets in New York exhibited 
some of the symptoms of panic. Returning ease in affairs par- 
tially restored confidence for the time, but the buoyancy of rail- 
road securities and land operations was lost, and to engage capital 
for any fresh enterprise had become a matter of serious difficulty. 
The consequences, however, had still to be met of the investment 
of an average of $60,000,000 a year in fixed capital in railroads, 
and of vast additional amounts required to complete construction 
already entered upon and to fund floating indebtedness. No small 
part of the bonds by which these debts were represented now de- 
pended largely upon the credit of individuals, and not upon their 
own real solidity, for the estimation which they still enjoyed in 
the markets, and thus added in no small degree to the increase of 
that general system of mutually dependent credit, in which the 
fall of a part may cause the fall of the whole fabric. 

This, then, was in general the condition of the United States at 
the beginning of the year 1857 : — the foreign trade of the country, 
which for some years had rapidly increased, but, as is probable, 
without being overdone, was stimulated to a high degree of activity. 
Internal trade had been pushed forward with a great expansion and 
lengthening of credits ; the railroad system in its rapid growth had 
absorbed much circulating capital and had also contributed a large 
share toward the increase of the vast system of credit on which 

T 



274 ESSAYS 

our domestic affairs rested. And finally, this mass of credit was 
managed by the aid of a great number of banks established upon 
unlike and often insecure systems, acting upon no common princi- 
ple, and with no important guaranty for the faithful and prudent 
discharge of their functions. 

In Europe the state of things was in few respects different from 
that seen here, and it may be said that throughout the commercial 
world the materials for a crisis were prepared and the consumma- 
tion fast approaching. It is too much to say that in such a state 
of affairs an explosion is inevitable, for a crisis may be reached 
and passed without panic, and be followed by stagnation instead 
of revulsion. But it is important to observe that the circumstances 
were such that whatever should produce an explosion in one country 
might easily lead to a general crash. Speculations may be local 
in their character, but the credit of merchants and bankers is a 
complicated bond uniting nations too closely to allow any one to 
escape from its share of the burden which disaster brings upon 
any other. 

At the beginning of the year 1857 the tone of general business 
in the United States was much less animated than it had been 
some months before. The year opened with but a moderately 
good domestic trade, some pressure for money being felt in all 
parts of the country, and it seems probable that some reaction had 
even then begun to be felt among consumers. The mercantile 
community, however, still had great confidence in the future, based 
on the knowledge that the crop of cotton then gathered, though 
smaller than that of the preceding year, was in quick demand 
abroad at advancing rates ; that the foreign demand for breadstuff s 
and provisions was large, and that in spite of an immense harvest, 
prices were firmly maintained ; while tobacco, then one of our chief 
articles of export, was higher than it had been for several years, 
and in strong demand. The importations made near the close of 
the preceding year had shown some falling off, and under these 
circumstances foreign exchange had suffered a little decline, show- 
ing that the real balance of trade at the opening of the year was 
on the whole inclining in favor of the United States. Shipments 
of gold continued, as was inevitable after the extraordinary impor- 
tation for the fall trade of 1856, but not at any unusual rate. In 



THE CRISIS OF 1857 275 

this state of things importers felt encouraged to increase their 
imports for the spring trade beyond any previous example. 

The spring trade, however, did not meet the expectation which 
had been formed. The money market remained close in all parts 
of the country, and merchants everywhere found their collections 
slow. Especially was this the case in the West, where the chronic 
deficiency of floating capital felt in that swiftly developing region 
had been aggravated by the collapse of land speculation and by the 
absorption of capital in railroad enterprises. The sales of the spring, 
therefore, were unsatisfactory, and importers found it necessary 
to force off their merchandise by auction to an unusual extent, and 
with heavy loss. Large stocks were also held over in bond by 
those who deemed themselves in position to do so, in the hope of 
an improved demand for the fall trade. It should be observed 
also that the heavy importations which were pressing upon the 
market at this time were largely swollen by a speculative move- 
ment in sugar, caused by the almost complete failure of the crop 
in Louisiana in 1856. This cause led to an immense increase of 
imports of sugar from an average of about $13,000,000 per annum, 
to nearly $42,000,000 in the year ending with June, 1857, so that 
on the latter date it was estimated that nearly 70,000 tons were held 
in New York alone, and at high prices, in the expectation of a still 
further advance. The effort required to carry this enormous stock 
in a market where existing business conditions were tending to lock 
up a large amount of capital in unsalable imports, was evidently a 
considerable aggravation of the situation. 

The state of affairs which can be so clearly traced in the move- 
ments of the import trade, also made itself felt in most depart- 
ments of domestic business. There was everywhere what may 
be called a premonitory chill, and some exhibition of uncertainty, 
if not of doubt, respecting the future, — the unfailing symptoms 
that although prices might often be maintained in many branches 
of business, speculation had reached its limit. It appears from 
the periodicals of the day that early in the year fears began to be 
expressed here and there that a crisis was approaching. Predic- 
tions of this sort, however, are unpopular, and are apt to be 
timidly expressed, except by those whose habitual fondness for 
the dark side of things deprives their foresight of all current 
value, and the mercantile world, in its calculations as to possible 



2j6 ESSAYS 

disaster, is generally ready to give more weight to the chances 
of escape than to the chances of failure. It would seem, how- 
ever, that the banks of the city of New York were sensible, as 
early as February, that the condition of affairs was unsafe, and 
that the expansion of their liabilities had gone too far, for in three 
weeks after the 7th of February, when their loans stood at $112- 
876,000, the highest point then known, they contracted them to 
$111,137,000 at the season when an increase instead of a contrac- 
tion was usual. Deposits which had for some time been irregular 
fell off by about $4,000,000, but in the first week in March the 
contraction was abandoned, and the expansion resumed. With 
the exception of a short reaction in April, the increase of loans 
then went on with tolerable regularity until the 8th of August, 
when they reached the extreme point for the year, and stood 
at $122,077,000. Although a large part of this expansion was 
offset by the creation of new bank capital, its effect in encour- 
aging dependence on an already over-stimulated credit is mani- 
fest. It is important to observe, however, that so far as their 
own position was concerned, the banks of New York had gained 
a little in strength since the beginning of the year. Comparing 
their returns in January with those for the last half of July and 
the first half of August, it appears that in the former month they 
held an average of eleven and one-half per cent of their liabilities 
in specie, and in the latter an average of twelve and one-half. 
This was a narrow basis for a business so vast as that indicated 
by the point reached by their loans, and shows that whatever 
caution their position in August required was equally needed in 
January. 

The banks of the city of New York began at this point to feel 
severely the effects of a practice which has more than once led 
them into difficulty. They had for a long time been in the habit 
of inviting the deposit of large balances, especially by the country 
banks, by paying interest for such deposits. Such transactions 
enabled the country banks to earn an interest of perhaps four 
per cent on sums which might otherwise be unemployed, while 
the city banks, obtaining funds at this moderate rate, were able 
v >_to increase their loans to several times the amount of the cash 
thus secured. But as the country banks were subject to demands 
from their own depositors, it was necessary for them to reserve 



THE CRISIS OF 1857 277 

the right of calling upon the city banks for their balances at any 
moment, and there was thus an amount of liabilities, variously esti- 
mated at from $8,000,000 to $1 5,000,000, which an unfavorable turn 
of affairs might at any time cause to be drawn from the city. In 
order to be in a position to meet such withdrawals, the city banks 
had fallen into the habit of making large loans upon call with 
collateral security. Early in August, when the bank loans had 
reached their height, the dangers of this part of the system had 
begun to develop themselves. The serious fall which had already oc- 
curred in the prices of railroad securities, which it would seem were 
a favorite form of collateral, had made it necessary to insist upon 
a larger margin of security above the amount lent, and it began 
to be felt that the curtailment of loans of this kind would be 
attended with some difficulty. It needed then only a strong de- 
mand by the country banks to cause a pressure by the city banks 
upon those who had borrowed from them upon call, and in the 
necessary tightening of the money market a similar pressure upon 
the regular borrowers on commercial paper. 

Reviewing the condition of affairs at the beginning of August, 
we find that although the money market in the cities had even 
shown some temporary ease from the large payments of dividends 
and interest on public and corporate securities in July, it had some 
disquieting symptoms. There was as usual at this season a distinct 
rise in the rates for foreign exchange, not caused, however, by any 
special demand for money abroad, for the Bank of England was 
able even to lower its rate of discount in July, but the effect of the 
heavy importations made in the past few months, which had added 
nearly $30,000,000 to the amount of goods ordinarily in the 
government warehouses. Under this rise in exchange the exporta- 
tion of specie began to increase, with the prospect of a serious 
drain, from which little relief was to be expected in an increase of 
domestic exports, since the favorable harvests in Western Europe 
promised but a light demand for breadstuff's, while it was still 
early for the exports of cotton and tobacco. This unfavorable 
state of affairs was aggravated by the increasing difficulty in mak- 
ing collections, especially in the West, and by the heavy demand 
for capital which began to be made by that section where the 
absorption of floating capital in unproductive enterprises was now 
felt in its full intensity. The interior banks of the Eastern and 



278 ESSAYS 

Middle states had for some time found their deposits declining and 
an increasing difficulty in keeping out their circulation, and in this 
state of things it could not be long before the country banks must 
make a serious call for their balances in New York to protect them- 
selves against this demand. 

That from one or both of these causes a drain had set in upon 
the New York banks at the beginning of August, is evident from the 
fact that although they increased their loans in the first week of 
this month by $1,500,000, their deposits, so far from rising, 
showed a slight decline, while their specie reserve fell off by more 
than $1,000,000. Feeling their condition to be one of some dan- 
ger, the New York banks in the second week of August began a 
contraction of their loans. Although this contraction was at first 
moderate, it was instantly followed by a large falling off in 
deposits, and this in turn led the banks to protect themselves by a 
still more rapid reduction of loans. On the 22d of August the 
banks had reduced their loans by a little less than $2,000,000 in 
two weeks, but the increasing stringency had caused their de- 
posits to fall off by more than $5,000,000, a difference which 
is accounted for by a loss of nearly $1,500,000 in specie re- 
serve, and for the remainder by an increase of banking capital. 
Of this loss in reserve a considerable part was occasioned 
by the withdrawal of balances by distant banks, which found 
that the demand upon them for loans was increasing, and which 
no doubt were often called upon more or less directly to lend 
their funds for use in New York itself. Thus the banks of 
Boston, the money centre next in importance to New York, 
slightly increased their loans during this period, but were shortly 
after compelled to begin a sharp contraction to protect themselves 
from an increasing drain toward New York. Prices in the stock 
markets had lately shown some improvement, but the general un- 
easiness and drain and the increasing stringency now made them- 
selves felt, particularly in a general decline of railroad securities, ex- 
hibited in an average loss of nearly eleven per cent on thirteen 
leading railroad stocks on the New York Exchange, between the 
7th and the 21st of August. 

Thus at the beginning of the last week of August the condi- 
tion of affairs had become such that it needed only some unusually 
startling and alarming event to convert the general tension of feel- 



THE CRISIS OF 1857 279 

ing into panic. Such an event occurred on Monday the 24th, when 
the Ohio Life Insurance and Trust Company suspended payments 
and closed its doors. This was a company with a capital of 
$2,500,000, engaged solely in the business of receiving deposits 
and making loans. Its principal office was in Cincinnati, but 
its agency in New York City had gradually absorbed a large 
share of its business, and by a course of management which had 
been at least imprudent, was found to have reduced the company 
to insolvency. Whether without this occurrence the money market 
could still have recovered its tone may be matter of doubt ; but its 
happening was the signal for uncontrollable panic, the disastrous 
course of which was inevitable in the absence of any real unity of 
counsel among the banks and of any important dominating influence 
like that of the Bank of England. The Trust Company was 
itself a large borrower from the banks and from private bankers, 
and had among its creditors small banks and depositors both in 
New York and in Ohio, so that the shock and distress caused by 
its suspension were immediate and widespread. One of the smaller 
banks of New York City failed on the same day ; several heavy fail- 
ures among bankers and merchants in New York and Boston fol- 
lowed in quick succession, and a week later came the failure of an 
important banking firm having connections at several points in the 
West. Failures among country banks of the Middle and Western 
states now began to follow each other rapidly, and in the general 
alarm the notes of solvent banks began to come in for redemption 
in large amounts. The banks of New York City continued to con- 
tract their loans as the alarm and stringency increased, and with such 
severity as compelled those in the other banking cities to adopt the 
same course. In three weeks following the failure of the Trust 
Company they had reduced their loans by more than $10,000,000, 
and deposit liabilities were diminished nearly $13,000,000. They 
had begun, however, at this point to gain in specie, their 
reserve, which had fallen on August 29 to $9,000,000, having 
advanced to $12,000,000 on September 12. Under the heavy 
pressure of the panic exchange was difficult of sale, and rates had 
fallen, so that although this caused a temporary difficulty in the 
exportation of domestic produce, still the export of gold had nearly 
ceased, and it promised soon to become profitable to import gold 
from Europe. It was accordingly the opinion of some financiers, 



280 ESSAYS 

and of some of the bank managers, that the banks should avail 
themselves of this turn in the exchanges and their own increasing 
strength, for the purpose of at once enlarging their loans, relieving 
the mercantile community, and so possibly allaying the panic. 
But if this could still have been done by a combined movement, it 
proved to be impossible to convince a large part of the banks, and 
among these some of the largest and strongest, that they were 
required to consult anything except their own safety, or that this 
could be found in any other course than that of contraction. 

The reduction of loans still went on, therefore, and in parallel 
course the reduction of deposits. Mercantile firms of high stand- 
ing began to give way in all parts of the country, and failures 
became more frequent and heightened the panic which prevailed 
among the depositors and note-holders of the interior banks. 
Productive industry was now seriously affected by the disorder 
in the money market and the consequent derangement of dis- 
tribution. As early as the 20th of September many factories and 
other manufacturing establishments in the Middle and Eastern 
states were slackening production, or in many cases were either 
closed or preparing to close until such time as the abatement of 
the financial storm might enable them to dispose safely of their 
stock of goods, then large for the season. Many establishments, 
and some of the first magnitude, found themselves embarrassed by 
the failure of commission houses or of their agents with large 
liabilities for goods already delivered. The extreme pressure for 
money, moreover, and the consequent difficulty of selling exchange 
drawn against shipments of produce combined with the disorgani- 
zation of internal exchanges to discourage the movement of the 
crops, and the arrival of flour and grain at tide-water began to fall 
seriously behind the receipts of the preceding year, with a corre- 
sponding loss of traffic by the railroads. On the 17th of the 
month the prevailing gloom was deepened by intelligence of the 
loss of the steamship Central America on her way from the Isth- 
mus to New York with nearly $2,000,000 in gold. On the 24th 
and 25th of September the banks of Philadelphia and Baltimore 
were compelled to suspend payments in specie, in consequence 
of the drain upon their gold caused by the general panic in the 
community ; a large part of the banks in Pennsylvania, Virginia, 
and Maryland followed their example upon its announcement by 



THE CRISIS OF 1857 281 

telegraph, and the banks of Rhode Island also suspended on the 
28th. The New York banks at once called a meeting to con- 
sider this event and issued a circular declaring that " the banks of 
the city of New York are in a safe and secure position " and 
that they could "not only sustain themselves as specie-paying 
banks," but would soon be able to assist the mercantile community. 
At that moment they had succeeded in raising their reserve of 
specie so far that it amounted to sixteen per cent of their liabilities, 
the latter being reduced by the cancelling of $20,000,000 of 
deposits, chiefly in the payment of loans. But at how great a 
cost to the public this strengthening of the banks had been accom- 
plished — if indeed it were a real gain of strength — was too 
plainly shown by returns of the Clearing-house, from which it 
appeared that exchanges amounting in July to $728,000,000 had 
fallen in August to $668,000,000 and in September to $482,000,000 
— a reduction which in a great commercial centre like New York 
could mean little less than the near approach of complete paralysis 
of affairs. 

At this time the Treasury of the United States had on hand an 
unemployed balance of nearly $12,000,000; and on the 23d of 
September the Secretary of the Treasury attempted to administer 
some relief to the money market from this source by announcing 
his readiness to buy the bonds of the United States at the current 
premium. Purchases were made in this way to the extent of 
nearly $4,000,000, but without producing any sensible relief, and 
were finally discontinued in consequence of a threatening decline 
of revenue and the rapid sinking of the Treasury balance. 

That hoarding was going on at this time to some extent 
appears to be beyond question. With the increasing demands 
upon the banks both in the cities and in the country there was 
a steady disappearance of specie, which could not longer be 
accounted for by exportation, since the turn of exchange. If we 
consider the specie movements of New York, by far the most 
important and significant, it appears that during the month of 
September the banks and the Treasury together lost $2,900,000 
of specie, to which we must add $1,600,000 received during the 
month from California. The net specie exports of the month 
were less than $200,000, so that we have a balance of $4,300,000 
which disappeared during the month from a market which was 



282 ESSAYS 

then attracting to itself specie from all parts of the country and 
which therefore received much that does not find its place in any 
record. 

From the date of the suspension of the Philadelphia and Balti- 
more banks, the course of the panic was marked every day by 
fresh mercantile failures and bank suspensions. Confidence had 
entirely disappeared and with it the chief bond of society in the 
commercial world, and nothing was now seen but a desperate 
struggle for self-preservation. The banks continued their harsh 
measures of curtailment, — measures which were declared by them 
to be defensive merely and by their half-ruined customers to be 
oppressive and certain to overwhelm all in a common ruin. Early 
in October another attempt was made by some of the bank 
managers to secure a general agreement to increase loans both 
in New York and in Boston, and resolutions were finally passed 
favoring an immediate expansion of three millions, which it was 
hoped might give sufficient relief to turn the current. But it 
proved to be easier to resolve than to act. Forty or fifty banks, 
each of which was compelled to consult its own safety, could not 
move forward simultaneously in such a line of policy, without some 
machinery which would insure each against the possibility of 
finding itself abandoned by the others ; and the concerted move- 
ment was accordingly a fiasco. Instead of the promised expansion 
of $3,000,000, the bank returns for the week ending October 10 
showed a reduction of $4,000,000 in loans and of more than that 
amount in deposits. It was alleged and was believed by many 
that the attempt to enlarge discounts had been defeated by a few 
of the stronger banks which were not unwilling to drive their 
weaker neighbors into liquidation and to confine the business of 
banking to fewer establishments. Whatever basis of truth this 
allegation may have had, the mercantile community was now 
appalled at the prospect before it of a continuance of the struggle 
between the banks and itself. Every day brought some fresh 
disaster. On the 9th notes of the Reading Railroad Company 
went to protest ; on the 10th it was announced that the Erie had 
suspended payment, the Illinois Central had made an assignment 
of its property for the benefit of its creditors, and the Michigan 
Central had asked for an extension of time on its floating debt. 
No corporation or commercial house appeared to be strong enough 



THE CRISIS OF 1857 283 

to resist the pressure of this suddenly enforced liquidation. To 
the list of bank suspensions was now added the Bowery Bank, 
which suspended on the 9th, the East River Bank on the 10th, 
and the Grocers' Bank on the 12th, all banks of the smaller class, 
which had been left to go down without an attempt to relieve them 
by their stronger neighbors. On Tuesday, the 13th, the run, of 
which there had been decided premonitions on Monday, set in 
with violence. The banks were all besieged from the opening 
of business by an excited crowd of depositors and note holders 
demanding specie. At the close of business it was found that 
eighteen banks had been obliged to suspend payment in specie, 
and it had become certain that none could long resist the demands 
of their depositors. At a meeting of the managers late in the 
afternoon it was resolved, in view of the prevailing excitement, 
that all should suspend on the next day. The Chemical Bank 
held out for three days, but was forced to follow the example of 
the others on the 16th. The banks of Boston suspended on the 
15th and with them all the New England banks, and the suspen- 
sion in a few days became general throughout the North and 
West. The only exceptions to it in the South were the banks of 
Kentucky and some of those of New Orleans. In both cases the 
sections upon which the banks relied were in a peculiarly strong 
position. Kentucky had enjoyed the benefit of high prices for 
tobacco and of large crops, and her banks had therefore felt less 
pressure from their customers than those of almost any other 
state; their specie resources were comparatively large, their 
deposits small, and their circulation in excellent credit. The 
banks of New Orleans also were in a community which found 
its great products in good demand and with the exception of sugar 
in fair supply, and at that season of the year had large credits 
both at the North and in Europe. They had for some years been 
strong in specie as a matter of habitual policy, and being, more- 
over, few in number, were able when the crisis came to act in con- 
cert upon a liberal plan. Their deposits showed a moderate 
decline and their circulation contracted to some extent, but still 
they kept up their loans and even made a slight increase of them 
during the panic. Four of the New Orleans banks suspended at 
the same time with those of New York, but the remaining five, 
being about three-fifths of the bank capital of the city, continued 



284 ESSAYS 

to pay all demands in specie ; and with those of Kentucky were 
the only banks in the United States which continued the full dis- 
charge of their obligations. 1 

It should be noticed here that the banks of Canada, which 
were also subjected to heavy pressure by the crisis in consequence 
of the close commercial connection between Canada and the 
United States, were able, nevertheless, to maintain specie payments. 
The directors of the more important banks were able by concert 
to establish a common policy; considerable credits in London 
strengthened their resources, and by avoiding any unnecessary 
curtailment of loans they prevented any panic among their cus- 
tomers and depositors, and passed through the crisis safely. It was 
stated that in their efforts to prevent any embarrassment in the 
export of Canadian produce they bought bills of exchange drawn 
against shipments early in October at rates three or four per cent 
higher than those at which they could then have bought exchange 
in New York. Their efforts to sustain the community depending 
on them were well rewarded, for the Commercial Bank of Canada, 
one of the largest, was able to say in its next annual report that 
not one of its customers who were doing a sound business had 
suspended payments. 

In the United States, on the other hand, it is not too much to say 
that before the general suspension of specie payments business 
had been reduced to complete paralysis. Exchange on England 
found so few buyers that few bills could then be sold above one 
hundred, the real par being about one hundred and nine and one- 
half. Breadstuffs and provisions therefore could not be moved from 
the West, and this section had nothing on which to draw domestic 
exchange for the payment of its debts to the East. The receipts 
of breadstuffs at tide-water in the six weeks before the suspension 
had suddenly fallen below those of 1856 by the equivalent of one 
million barrels of floor. One-half of the imports arriving at New 
York went at once into the public warehouse to avoid the payment 
of duties on articles which for the time were not salable, and the 
withdrawals from warehouse fell to half their usual amount. 
Merchandise of every kind was for the moment a drug, and an 
active exportation of imported goods began as soon as the con- 

1 Individual banks elsewhere are said to have maintained themselves on a specie 
basis. See Bankers' Magazine, 185 7- 185 8, pp. 505, 507, 658. 



THE CRISIS OF 1857 285 

dition of the exchanges would permit. The loss in prices in the 
wholesale market and upon the great staple necessaries of life 
was immense ; but it was observed that in sales by retail, consumers 
were late in obtaining any corresponding concession, time being 
necessary as usual to determine whether the reduction in prices 
was transient or likely to continue, before the retail dealers could 
be forced to make their own prices conform. 

In stocks the fall of prices was still heavier, for in the course 
of the panic some corporations had justly lost their credit, and 
others suffered from bad associations in the mind of an undis- 
criminating public. Taking the thirteen leading stocks before 
referred to as a test, the quotations show a loss in price of forty-three 
per cent in the two months ending October 9th. State bonds showed 
an average decline of ten per cent in the same time. United States 
six per cents alone held their old quotations, being sustained by the 
purchases for the Treasury ; but after the middle of October, when 
purchases were discontinued for lack of funds, these securities also 
fell from one hundred and seventeen and one-half to one hundred 
and eleven. To what extent the fall in stocks was increased by 
the return of stocks held abroad under the influence of the panic 
cannot well be determined, but it is quite probable the influence 
thus exerted on the market was less than has been supposed. 
Indeed, at the height of the crisis, it was stated in New York that 
orders for the purchase of stocks to a considerable amount had 
been received from abroad, but could not be executed on account 
of the difficulty in selling the exchange which was to be drawn. 

For the banks and their customers the effect of suspension 
was to give immediate relief from the heavy pressure, and to 
enable them to carry through in a less ruinous fashion the liquida- 
tion and the disengagement of capital, which the revulsion ren- 
dered inevitable. Individual banks could now enter upon a more 
liberal policy, quite regardless of the action of other banks, since 
an unfavorable balance at the Clearing-house involved no longer 
loss of reserve, and by refusing to lend a bank could not strengthen 
itself at the expense of its neighbors. The removal of this check, 
however, was not followed by increased loans, but further con- 
traction ceased virtually with suspension. 1 

1 The bank statements of the 17th and the 24th of October show some further 
reduction of loans, which is probably accounted for through the elimination of failed 



286 ESSAYS 

The movements of specie at the height of the crisis promptly 
responded to the fall and rise of foreign exchange. The turn of 
exchanges " in favor of the country," as it is called, was effected by 
the news carried out by the Baltic on the 28th of September, four 
days after the suspension of the Philadelphia and Baltimore banks, 
when the difficulty in selling bills drawn against shipments had forced 
sterling exchange down to about one hundred and five. The Baltic 
reached Liverpool on the 6th of October ; the Bank of England at 
once raised its rate, but the Europa on the 10th sailed with ,£63,000 
in specie, which reached Boston on the 22d. This was the real 
beginning of the stream, some small shipments earlier in date being 
made upon uncertain grounds and as a speculation. The stream 
was strongest from the 10th to the 29th of October, but continued 
to flow until about the middle of November, when it was stopped 
by the extraordinary pressure in London and by the news that 
exchange had risen in New York to a point which made the ship- 
ment of specie to Liverpool profitable. Indeed, the Asia, which 
left Boston October 28th, carried $100,000 a little in advance of 
the general returning current of specie toward Europe, and some 
of the later shipments from Liverpool crossed on their way the 
early returning shipments from New York, and more than one 
English steamer took back a part of the gold which it had brought 
on its outward passage. The actual amount of specie sent from 
England to the United States in these operations was stated by 
the Governor of the Bank of England to be .£1,134,000. 

Specie was heaped up beyond all precedent in the banking 
history of New York; with the diminished wants of business, 
deposit liabilities were increased by the receipts of specie and not 
as before the crisis by the increase of loans, and the circulation of 
the banks was sensibly lessened. The Clearing-house returns 
show that the weekly exchanges of the banks had fallen by the 
1st of November to $57,600,000, an amount scarcely equal to one- 
third of the weekly exchanges in the latter part of the summer. 
In the other banking centres the course of things was the same 
as in New York, and even such country banks as were disposed 
to maintain their business on an unsound basis, found themselves 

banks. From that time to the end of the year changes in loans, from week to week, 
were insignificant in amount, clearly reflecting the condition of general business depres- 
sion, which continued for many months after the acute panic of October. 



THE CRISIS OF 1857 287 

compelled, by the terms on which their circulation was redeemed 
in the cities, to restrict their issues and strengthen their position 
preparatory to a return to specie payment. Specie continued, 
however, for some weeks after the suspension to be sold at a small 
premium, sometimes ranging as high as three per cent, when 
required in quantities for the payment of duties on imports or in 
preparing for foreign voyages, until the banks found themselves 
strong enough to supply the specie wanted for such purposes, 
in advance of formal resumption ; whereupon the premium on 
specie disappeared. But with some restriction in the terms on 
which the notes of country banks were received on deposit in the 
cities, general business was carried on with the same paper currency 
as before the suspension, and with the same system of deposits 
and checks, and it was only in the comparatively infrequent case 
of a desire to exchange bank-notes for specie for some particular 
transaction that the change to an inconvertible currency was 
observed. In preserving this condition of affairs during the time 
in which the city banks were strengthening themselves for 
resumption, important relief was obtained from the regular semi- 
monthly receipts of bullion from California, from the small amount 
of gold required for the payment of duties on the diminished 
imports, and for a time from the state of exchanges with Europe. 

From this statement of the success with which the credit of an 
inconvertible bank currency was kept up during the two months of 
suspension must be excepted a large number of banks in the 
interior and particularly in the West. Early in the crisis the 
decline of the securities on which the circulation of some of 
the Western states was based had brought their banks into diffi- 
culty and discredit. Others were weakened or carried down by 
the failures of individuals or of railroad corporations. There was, 
therefore, throughout the crisis a rapid forced contraction even of 
such part of the Western currency as was not withdrawn in con- 
sequence of the insolvency of the issuing banks, and this increased 
the difficulty of making collections in the country and added to the 
general embarrassment of exchanges. After the suspension the 
process of contraction still went on ; bank-notes in circulation in 
other states were returned to the state where they were issued, 
and in the Eastern cities a heavy discount upon Western bank 
paper drove it home. The process of calling in this paper was 



288 ESSAYS 

painful, but it was also salutary. It withdrew a part of the circu- 
lation which had little real strength and much of which ought never 
to have been issued, and, leaving only such part of the currency as 
was comparatively sound, it enabled the West to follow the East, 
though somewhat tardily, in the resumption of specie payment. 

At the beginning of December, 1857, the banks of New York 
found that their stock of gold had risen to $26,058,000, or nearly one- 
third of their liabilities, and was increasing from week to week, 
while the demand for money was small and the news from every 
quarter indicated the restoration of quiet. They accordingly voted 
to resume specie payments on the 14th, in which step they were 
at once followed by the banks of Boston and of a large part of New 
England, together with those of the state of New York. The 
banks of Providence resumed on the 13th of January, those of 
Philadelphia and Baltimore on the 3d and 5th of February, the 
Virginia banks on the 1st of May, and the resumption was general 
by midsummer. The returns published by the Treasury Depart- 
ment show that at the beginning of 1858 the banks of the United 
States had diminished their loans by $100,000,000; their deposits 
had fallen off $44,000,000 ; their circulation nearly $60,000,000 ; 
while their specie had gained about $16,000,000; of which nearly 
the whole was by the banks of New York City. The diminution 
in the circulation of bank-notes, caused chiefly by the diminished 
requirements of business, was nearly thirty per cent, taking the 
country as a whole, while in the manufacturing centres it was 
even greater. Thus the country banks of Massachusetts, issuing a 
circulation used by an active industrial population and sent in 
the course of business into distant states where it was received 
with favor, found their notes reduced from above $16,000,000 to 
$9,600,000. This state of things, sometimes called a plethora of 
capital, but in fact mere stagnation, continued for the most part 
until midsummer. The loans of the banks were slowly increased 
after January 1, but there was no general revival of business to 
counteract the tendency of capital to accumulate in the financial 
centres. Nor did it seek an outlet by the exportation of specie 
beyond the receipts from the mines, for there was no demand for 
money abroad, and there was no disposition, and indeed little 
ability, on the part of consumers, to renew importations of foreign 
goods on any large scale. The fiscal year closing with June, 1858, 



THE CRISIS OF 1857 289 

showed a falling off in imports of foreign merchandise of 
#85,000,000, nearly half of which was in the imports of manu- 
factures of cotton, wool, silk, flax, and iron, besides which the 
reexportation of foreign goods increased by nearly $6,000,000. 
On the other hand, domestic exports suffered a decline of only 
about $27,000,000, chiefly caused by the reduced demand for 
breadstuffs, while the cotton crop, notwithstanding the shock 
which the manufacturers suffered from the revulsion, maintained 
its price so well in consequence of the moderate supply for the 
two cotton years ending with August, 1858, that the value of the 
export did not fall off. The result of this general state of trade 
was that the net exportation of specie from the United States for 
the year ending with June, 1858, was only $33,000,000, being 
considerably less than the product of the mines. 

The land speculation which has already been adverted to as a 
characteristic of the period preceding the crisis was for the time 
crushed by the revulsion. The receipts by the government for 
sales of public lands, which had already suffered from the chill 
experienced in advance of the crisis, fell off somewhat in the fiscal 
year 1858 and still more in 1859. How great the diminution in 
such transactions was in some parts of the West is evident from 
the fact recorded by the Commissioner of Statistics for Ohio, that 
the mortgages of real estate given in that state, amounting in 
1857 to $38,000,000, fell off to $25,000,000 in 1858. And the 
number of emigrants arriving in the United States, which is an 
important factor in the demand for land, especially in the newer 
states, fell from 251,000 in the year ending with June, 1857, to 
123,000 in the year ending with June, 1858. Railroad enterprises 
also suffered a severe check from the revulsion ; the owners of 
many railroad securities found that their capital had been invested 
in advance of the real wants of the country, and as a natural result 
the number of miles built in the next three years, 1858, 1859, an d 
i860, fell considerably below that of the number built in the two 
years 1856 and 1857. 

The heaviest pressure from the revulsion was felt, however, by 
the laboring classes. The destruction of credit stopped at once a 
large part of the machinery of productive industry. Even had the 
stocks of goods generally been small, it would have been necessary 
for many manufacturers to stop for the time, owing to the difficulty 



290 ESSAYS 

both of making sales and of procuring the capital with which to go 
on. But stocks were large in most branches of trade, the high prices 
of the year before the crisis having stimulated production into great 
activity, and it was therefore a considerable time before the old 
supply of goods was so far sold as to make it necessary to resume 
operations for the supply of the current wants of the country. 
During this period, in which the country was on the whole simply 
consuming the accumulated products of its previous industry, thou- 
sands of workmen were unemployed and thousands of families 
were reduced to extreme privation. Many corporations and indi- 
vidual manufacturers attempted to carry on their works and to keep 
their operatives in at least partial employment, but not a few found 
that even on these terms it was impossible to continue to pile up 
goods for which there was no sale except at a sacrifice, and were 
finally obliged like the others to suspend their operations until 
better times. 

How many persons were thus thrown out of employment at the 
beginning of the cold weather it is impossible to say ; but they 
must have been numbered by hundreds of thousands. As early as 
the ist of October it was reported that all the cotton and woollen 
mills near Philadelphia had stopped, and that the Rhode Island 
mills were either closed or working on short time. And from that 
time on the papers of the day were full of the reports of closing in 
the cotton and woollen manufactures, the iron trade, the manufac- 
ture of boots and shoes, and of clothing. No branch of industry 
seemed to escape unscathed. The real extent of the calamity may 
be better realized from a few significant facts. It was said by 
a leading cotton manufacturer that "in January (1858), there 
were 502,000 spindles stopped in Rhode Island and 216,000 run- 
ning, and these represented pretty fairly the condition of the mills 
in other states." To stop 500,000 spindles implied the idleness of 
more than 15,000 men and women, and of the spindles then existing 
in the Northern states Rhode Island had a little less than one-fifth. 
The iron interest of Pennsylvania was notably slow in reviving, 
and its product in 1858 was estimated at only one-half that of the 
previous year, while it would appear that from October, 1857, until 
the following spring, the large majority of the iron works were idle. 
The great New England manufacture of boots and shoes, which 
then employed 80,000 operatives, began to slacken its operations 



THE CRISIS OF 1857 291 

as early as September, 1857, and remained inactive until the 
next spring. 

For the country in general the actual recovery from the revul- 
sion appears to have begun in the latter part of the winter of 
1857-1858. In several branches of production, demand began to 
spring up from the actual exhaustion of stocks by consump- 
tion, and capital then seeking employment at low rates, manu- 
facturing began, in some cases cautiously and on a small scale, 
in others, as in the cotton manufacture, boldly and even pre- 
maturely. By midsummer there was tolerably active employment 
in most important branches, except in the production of iron, which 
was slow in its recovery from the depression of railroad enterprise 
and from the moderate demands made upon it by the other indus- 
tries on which it is dependent. The resumption of operations on 
their former scale, however, was everywhere retarded by the efforts 
made to effect a general shortening of the terms of credit. This 
change, which was essential for the soundness of trade, checked 
buyers for a time and bore with especial severity upon the West. 
That region had suffered from the revulsion more severely than 
the rest of the country, owing to the collapse of its real estate and 
railroad speculations, and the breaking down of the prices of its 
leading staples at a moment when its purchases had for some 
time been on a liberal scale. Entering upon the new year of 
resumption under these difficulties, it had received a further blow, 
for the crops of the year 1858 were at best moderate, while the 
continued abundance of crops in Europe diminished our exports of 
breadstuffs and lowered prices, so that the West, in settling her 
indebtedness in that year, neither had so much to sell nor could 
sell it at so high rates as in the previous years. The South, on the 
other hand, was in far better condition to accept shorter credits. 
The favorable cotton crop of the fall of 1857 has already been 
noticed as one of the circumstances which strengthened that 
section at the critical moment. The crop for 1859 was still larger 
and prices firmer, so that there was an increase of $30,000,000 in 
the value of the cotton exported. Moreover, the sugar plantations, 
which had yielded only a quarter of a crop in 1856, had given a 
fair product in 1857, an d in 1858 the largest but one that had ever 
been known. If we except Virginia, which in 1858 had a short 
crop of tobacco, the South was, in general, in a good condition for 



292 ESSAYS 

the establishment of a healthier condition of trade, and had no 
serious obstacle to overcome except its own lavish and improvi- 
dent habits. 

The course of recovery throughout the country can be traced 
tolerably well in returns from the banks. Bank loans, from their 
low point at the beginning of 1858, increased steadily through the 
year, though they did not reach their former heights, taking the 
country as a whole, until late in 1859. In New York and Massa- 
chusetts, however, there was a more rapid expansion, and as early 
as August, 1858, the loans in these two states had passed the high- 
est point reached before the crisis in 1857. The circulation of 
the banks, however, did not again reach the point which it touched 
in that year. This was due in a measure to the smaller require- 
ments of the country in a period of moderate business activity, 
and in part to the adoption of more stringent systems of redemp- 
tion, which compelled the interior banks of some states to meet 
their notes with a promptness to which they were not used and 
thus restricted their circulation. And it is to be noticed that the 
severe lessons of the revulsion led to some special efforts toward 
placing the banking system on a broader basis. The New York 
Clearing-house adopted a rule requiring the banks belonging to 
it to keep in hand coin amounting to twenty per cent of their liabili- 
ties ; and the legislature of Massachusetts passed an act requiring 
the banks of the state to keep a minimum of fifteen per cent of their 
liabilities in specie. A majority of the banks of the city of New 
York also declared in favor of abandoning the practice of paying 
interest on deposits, but as this virtuous restriction did not take 
the form of a positive rule binding upon all, it had no permanent 
influence. On the whole, however, it is probable that the condition 
of the banking system of the country after the revulsion, many as 
were its defects, was considerably better than it had been before. 

Notwithstanding the tending to a gradual return of activity 
and confidence, however, the year 1858 was a hard period of 
straitened enterprise and small returns. Prices were low, demand 
was sluggish, and a cold caution had followed the fever of specu- 
lation. The aspect of affairs brightened as the year went on, but 
even in 1859 it could not be said that the effects of the revul- 
sion had ceased to be felt. Some of its traces were indeed indeli- 
ble. The ruin of great mercantile houses, the blighted hopes 



THE CRISIS OF 1857 293 

and fortunes of individuals, mark the year 1857 as one of the most 
memorable in the annals of commerce. But in a country like the 
United States, which is still in the fresh vigor of its youth, its 
natural growth gives it a seeming elasticity which enables it to 
surmount all disasters quickly and soon repairs all losses and even 
disguises the consequences of the most serious errors. Three 
years had not passed, therefore, before the pursuit of wealth was 
as eager and confident and the prosperity of the country appar- 
ently as great as ever. The lessons learned in the bitter months 
of 1857 were passing out of mind, and the country was once more 
well advanced in that inevitable cycle, " quiescence, — next, im- 
provement, — growing confidence, — prosperity, — excitement, — 
overtrading, — convulsion, — pressure, — stagnation, — distress, — 
ending again in quiescence." 1 

1 Lord Overst one's Tracts, p. 31, 



THE CRISIS OF i860 1 

The financial condition of the United States in the earlier part 
of the year i860, although not disquieting, was far from satisfac- 
tory. The recovery from the disasters of 1857 had been consider- 
able, but had not been so uniformly distributed as to restore ease 
and a sound state of business in all sections. The South had had 
the benefit of large exports of cotton for five years in succession, with 
prices which were sufficiently well sustained by the increase in the 
cotton manufacture in all parts of the world to raise the worth of 
the crops in money beyond all precedent. Thus the cotton crop of 
1855- 1856, the largest which had then been made, was a little more 
than 3,600,000 bales, of which the nearly 3,000,000 bales exported 
were valued at $128,000,000; but the crop sent to market in the 
winter of 1 859-1 860 was 4,670,000 bales and the export value was 
$192,000,000, while the purchases for consumption in the United 
States were also larger than ever before. The export value of the 
tobacco crop also, although variable, had for four years been much 
above any previous figures, although there had been a moderate 
decline in price from the beginning of 1858, and of course a con- 
siderable reduction from the inflated prices of the summer of 1857. 
Sugar had also become once more an important, though an unsteady, 
product, the value of which was now upon a much higher level 
than before. During the years succeeding the great revulsion of 
1857 then, the South had been prosperous, and its prosperity was 
the more marked because it had fewer losses to be repaired than 
the other sections. True to its traditional habits, however, the 
South had availed itself of its opportunity to buy freely, and to this 
end had used not only its large means, but also its ample credit. 

The West in the meantime had recovered only by slow degrees 
and painfully from the depression caused by the revulsion. Its 
crops had been moderate, the foreign demand for its great staples 

1 See note, p. 266, above. 
294 



THE CRISIS OF i860 295 

had fallen off, and prices had been low. In the years succeeding 
1856, England, the most important single customer for those 
products, had continued to be a large buyer, but had drawn a 
smaller proportion of her supplies from the United States than 
formerly, in consequence of the renewal of her trade with the 
Baltic and Black seas and her large purchases from Germany and 
France. Thus our exports of breadstuffs, which for each of the 
fiscal years 1856 and 1857 had been more than $50,000,000, had 
fallen to $32,500,000 in 1858 and $22,800,000 for the fiscal year 
i860. The foreign demand for provisions had been sustained better, 
but still prices had been moderate and had not been sufficient to 
restore to the West its full measure of prosperity in any year. 

The manufacturing and commercial sections of the country had 
been more fortunate in their recovery. The great abundance of 
capital seeking employment after the revulsion led to some pre- 
mature efforts, and the haste with which the banks expanded their 
loans conduced to the same result. Business strengthened, how- 
ever, by degrees, and the demand for labor became active ; and 
although dealers experienced difficulty in procuring settlements 
among their Western customers, a fairly profitable trade had 
sprung up as early as 1859. Manufacturing became brisk, and in 
many branches was extended by the introduction of new capital 
and additional machinery. In some branches indeed there was a 
considerable over-production, caused by the abundance of capital 
and undue confidence in the increase of demand, and followed by 
a reaction in prices. 

The foreign trade of the country during these years is highly 
significant. The fiscal year ending with June, 1858, was of course 
wholly abnormal in this respect, since it covered the period of the 
revulsion and of the severest depression. In this year the imports 
of merchandise fell off by $85,000,000 and the reexports increased 
by $6,000,000, so that the foreign merchandise introduced for con- 
sumption was diminished by $91,000,000. On the other hand, the 
revulsion having been general, the same causes, which in the 
United States checked the desire to buy, operated also to check 
purchases from us by foreign nations, although in a less degree, 
owing to the indispensable character of our great staple export. 
The export of merchandise from the United States declined, there- 
fore, in this year, but only to the extent of $27,000,000, and thus 



296 ESSAYS 

the imports and exports of merchandise were for once nearly equal, 
while the balance of specie exported was reduced to $33,000,000. 
This was in short a year of enforced economy in which the people 
of the United States bought as little and sold as much as possible ; 
and that a commercial nation whose tonnage earned heavy freights 
had in the balance of the year to pay more than it received was, 
unquestionably, due to the debt which remained to be settled from 
the year 1857 and to the interest, estimated at not less than 
$20,000,000, payable on state and corporation bonds owned in 
Europe. The year 1859 showed a great increase of confidence, 
the net imports of foreign merchandise increasing by $74,000,000 
and falling only $17,000,000 short of the point reached in the 
fiscal year 1857. If indeed the imports for the whole of the fiscal 
year ending with June, 1859, na d shown the same increase as was 
shown by the last half-year, the aggregate of 1857 would have 
been far exceeded. This heavy increase of imports in the last half 
of the year was no doubt based on the knowledge that the cotton 
crop of the year was larger than ever and on the state of ex- 
change caused by the enormous exports of this product. On 
the whole, the fiscal year closed with an apparent excess of exports 
over imports of only $18,000,000, the exportation of bullion having 
once more become equal to our product. In the year 1858, indeed, 
the discredit or disappearance of so large a part of the bank 
currency no doubt created some domestic demand for specie 
beyond what was used ; but this did not extend so far as to re- 
quire the retention of much, if of any, of our product for the next 
two years. Of the latter half of the calendar year 1859, making 
the first half of the fiscal year ending with June, i860, it is enough 
to say at present that it was marked by a still further increase in 
imports and by the gradually increasing certainty that the United 
States had in hand the largest crop of cotton ever raised on its soil. 
During the years 1858 and 1859, tne banking interest had 
been extended in every section, and in some with little regard to 
its safety. In the Western states particularly, in spite of the 
banks swept out of existence in 1857, the bank capital at the 
beginning of i860 showed a nominal increase of more than 
twenty per cent. Numbers of banks had been established in 
several states on systems bearing a general resemblance to the 
free banking system of New York. But the New York system, 



THE CRISIS OF i860 297 

which had given great satisfaction, secured the note-holder from 
loss by limiting the securities on which the notes were issued 
to certain classes of sound stocks ; whereas in the Northwest 
and in Missouri a wide range was permitted and the issues were 
in fact based to a great extent upon stocks which as the event 
proved were of unstable value. The circulation issued in this 
manner was also excessive, even as compared with the standard 
of the United States, and the arrangements for its redemption 
were little more than evasions of this duty, so that the whole 
West and Northwest was overrun with a practically inconvertible 
currency often circulating at a discount which made itself pain- 
fully apparent when the holder sought to buy exchange for remit- 
tance to the East. The banks of the South and Southwest, even 
omitting the exceptionally strong ones of Louisiana, were on a 
firmer basis. Indeed, in specie reserves, the South and Southwest 
was stronger in proportion to its bank capital and liabilities than 
the North and West, notwithstanding the large accumulation of 
specie at New York. This, however, was a point of manage- 
ment as to which neither section had much to boast of, outside 
of one or two leading cities. In New Orleans the law required 
the banks to have a reserve of specie amounting to one-third of 
their cash liabilities, and they usually had more. In New York 
the banks by custom since the suspension in 1857 kept on hand 
an amount of specie seldom much less than one-fifth of their 
cash liabilities ; and these two cities held generally about forty 
per cent of the bank specie of the United States. In both the 
amount of specie had declined considerably during the year 1859. 
In New York, where the specie in the banks had at one time in 
1858 exceeded $35,000,000, it had fallen to an average of about 
$20,000,000, as was to be expected from the increased exports 
of gold and the fuller employment of capital in business. 

The course which the banks had pursued in extending their 
loans from the beginning of 1858 to the beginning of i860 was 
the object of much unfavorable criticism. During the period of 
the low money market, bank loans were increased to a degree 
which exceeded the highest inflation of 1857, and while their 
abundant specie made the position of the banks strong, it was 
clear that their eagerness to employ their resources was stimu- 
lating adventurous enterprise in advance of the real recovery of 



298 ESSAYS 

the country, and was exposing the community to violent fluctua- 
tions in the money market, and to the chance of some dangerous 
relapse. Indeed, in the fall of 1859 there had been a period of 
considerable stringency, which had passed off, without, however, 
inspiring much additional steadiness in the management of the 
banks. The managers of the banks were stimulated to take this 
course by the great accumulation of capital in their hands, a large 
part of which must have been idle but for their efforts to extend 
its employment in loans ; but in thus pursuing their own interests 
they excited speculation, at a time when the tendency of the public 
was toward caution, and gave a powerful impulse toward a fresh 
expansion of credit. As the year i860 advanced there was a dis- 
position in some branches of trade to lengthen the terms of credit, 
which had wisely been shortened after the disasters of 1857, and 
to return to the old system of high pressure. 

At the close of the fiscal year ending with June, i860, it 
appeared that while there had been in many quarters complaints 
of irregularity and occasional dulness in affairs, foreign imports 
had exceeded those of any year, not excepting 1857. The 
merchandise imported had been beyond all precedent ; but there 
was some diminution of imports and an increasing disposition to 
send goods into warehouses in the closing months of the spring. 
The immense crop of cotton had carried the exports also beyond 
any previous figures ; but the deficient demand for breadstuffs had 
left a large balance to be settled by the exportation of specie, 
exceeding in amount the gold product of the year. This remarka- 
ble recovery in the demand for foreign goods at a time when pro- 
ductive enterprises were not receiving any general development 
could hardly be deemed a healthy symptom. Indeed there were plain 
indications of reaction to be found in the slackening of importations 
already referred to, and in a considerable decline in the call for 
money since the beginning of the year i860. But, as the summer 
passed on, all this was changed by the appearance of a new set of 
conditions in our commerce, both domestic and foreign. The year 
had been favorable in the West, and it was found that that section 
was sending to market the largest crop which she had then ever 
raised. Her granaries were full of corn and wheat, every means 
of transportation was taxed to its utmost, and in the midst of this 
plenty there was an increasing probability that Europe would once 



THE CRISIS OF i860 299 

more be a large buyer of Western wheat and flour. The West, after 
its two years of ill-requited effort, had a prospect of such prosperity 
as she had never yet seen. There was a strong advance in railroad 
stocks, amounting to nearly forty per cent on an average of twelve 
important lines of transportation. Merchants in New York and 
the East began to look with increasing favor on Western trade, 
while the owners of shipping advanced their rates of freight in 
expectation of a year of large business and high profits. At the 
same time, while the reports as to the probable magnitude of the 
cotton crop were conflicting, there was hardly any limit to the gen- 
eral confidence in the elasticity of that export, and its capacity to 
make good in price any shortcoming in quantity. 

The horizon was obscured, however, by one cloud which became 
more and more portentous as the season advanced. This was the 
increasing gloom in the political situation of the country. The 
canvass for the presidency then in progress had assumed a dis- 
tinctly sectional character, and there was a prevailing conscious- 
ness that it was based on irreconcilable differences of principle 
and of interest. So far as the platforms of parties were con- 
cerned it involved only the old question, more than once laid to 
rest as it was supposed by our statesmen, of the extension of 
slavery, and had an intensely legal and unpractical aspect. 
Behind this formal discussion, however, there was deep aversion 
to the system of slavery itself on the one hand and devotion to it 
on the other. Indifference to the moral bearings of the subject 
had indeed become impossible, long before the country in general 
recognized its impossibility. Of the two great divisions, the South 
was the first to comprehend this and to realize all that was implied 
in the success of the party opposed to the extension of slavery ; 
and thus while even after the election in November, only a mi- 
nority of the Southern people were prepared for disunion, the com- 
munity in general of those states had long been in a state of alarm 
at the prospect before it. Without any distinct perception of the 
form which the danger might take, the people of those states felt 
the increasing probability of some violent convulsion at a time when 
the public in the Northern states were for the most part inclined 
to regard all predictions of trouble as merely a part of the election- 
eering tactics by which conviction was to be overcome by fear. It 
is certain that credit was affected in the South some weeks before 



300 ESSAYS 

it showed signs of disturbance in the North. Exchange in the North 
began to be difficult of sale in the Southern cities before the end of 
the summer. The banks of New Orleans, as appears from their 
returns, had begun as early as the beginning of August to dimin- 
ish their purchases of exchange below the usual point and to call 
in their distant balances, using their funds in short loans on the 
spot apparently as a precautionary measure. 

We must now observe the position in which the New York 
banks found themselves when the storm finally burst upon the 
country. During the summer these banks had carried their loans 
above $130,000,000, with a specie reserve amounting to nearly 
twenty-five per cent of their liabilities. At this time stock specu- 
lation, especially in Western securities, was active, prices were buoy- 
ant, and it is probable that a large part of the increased facilities 
then afforded by the banks was employed in this direction. The 
steady decline of their specie, however, in the last few weeks of 
this advance and the approach of the season when the wants of 
legitimate business increase, led the banks to retrace their steps. 
They contracted their loans, from the highest point for the 
summer on the 25 th of August, for eight weeks at the rate of 
$1,000,000 per week, with a corresponding decline in deposits while 
their specie reserve underwent little change. During this time the 
loans of the Boston and Philadelphia banks remained almost sta- 
tionary, and in New York it was a matter of remark that the busi- 
ness community felt the contraction but little and that the current 
rates for money were not greatly affected. The stock market felt 
some reaction, however, at the beginning of October, partly by 
reason of the reduction of loans and partly also from the fact 
that speculation had no doubt carried prices beyond the point 
which a single year of good business on the great lines would 
justify. The market was weakened, therefore, and became a little 
irregular early in the month from natural causes, quite distinct 
from any political apprehension ; but prices rallied in a few days, 
the general money market becoming easier, notwithstanding the 
progressive contraction of bank loans. The state election in Penn- 
sylvania, which was always justly regarded as an important index 
of the probable result in the national election in the following 
month, occurred on the 9th of October, and the Republican party 
was the victor. The chances of political disturbance now became 



THE CRISIS OF i860 301 

the argument most insisted upon by those who were operating for 
a fall in stocks ; but still no such real alarm was felt as to affect 
prices until some days later. By the middle of the month, how- 
ever, a tendency to decline was fairly visible, notwithstanding the 
ease in money, the advancing prices for cotton and breadstuffs in 
consequence of an active foreign demand, and the downward turn 
of exchange, which had fallen below the point at which specie 
could be profitably shipped. The state of feeling now became 
more uneasy every day. The stock market became unsettled and 
dull, neither buyers nor sellers being as yet disposed to act decid- 
edly. On the 22d of October the bids for a five per cent loan of 
$10,000,000, advertised by the United States government, were 
opened and were found to amount in the aggregate to $10,500,000 
at an average premium of about one-half of one per cent. The rate 
was fair, but still the transaction did not strengthen confidence, 
the limited amount of the proposals causing much remark. The 
threatening reports from the Southern commercial cities now 
attracted attention, and a sharp decline in stocks began, which for 
a few days had almost the character of a panic. In this movement 
the bonds of Southern states were of course seriously affected, the 
fall in those of Virginia, North Carolina, and Tennessee being on 
the average about eight per cent for the month of October. The 
fall for the month in the securities of the Western railroads was 
even more serious ; but a part of it was regained by a temporary 
recovery in the last few days. 

At this time and down to the presidential election, the press- 
ure in the money market of New York and the other Eastern 
cities was not serious. Such tendency as might have been felt 
in this direction was no doubt in part counteracted by an increase 
of nearly $4,000,000 in loans made by the banks between the 
20th of October and the election, in view of the steadiness of their 
deposits and their gain in specie. In the Southern cities, how- 
ever, the pressure was becoming intense, political apprehension 
having there become universal, while the grounds for it were still 
the subject of debate at the North. For similar reasons the strin- 
gency in Baltimore was early and extreme. In the Western cities 
also distress began to be felt, owing to the vicious character of the 
local currency at a moment when the abundance of most forms of 
material wealth had filled the public with confidence. Especially 



302 ESSAYS 

in Illinois and Wisconsin the evils of too free banking began to be 
cruelly felt. Of ninety-four banks of Illinois issuing a circulation 
amounting to over $12,000,000, one-half were at that time banks of 
circulation only, engaged in no business except that of issuing 
notes based upon stocks and state bonds, and of their securities 
nearly two-thirds were bonds of Missouri, Virginia, North Caro- 
lina, and Tennessee, all of which were then rapidly declining. In 
Wisconsin, where the circulation of bank-notes was $4,500,000, the 
state of things was equally bad. The local currency of Indiana 
was also infected with the same disorder. To the evils of 
the practical inconvertibility of this currency of the West and 
Northwest, which had long since caused some depreciation, was 
now added the misfortune of thorough loss of confidence in the 
basis of credit on which the currency depended. 

The election of Lincoln as President on the 6th of November 
was followed by a slight movement of relief in the market, as if the 
country breathed more freely now that the decision was made ; but 
this was followed by depression, which was deepened by early news 
from the South. Not only did the resignation of United States 
officers in the South and the tone of the political press and the 
politicians portend a quick development of the movement for 
secession, but there was a sudden fall in the Southern cities of the 
rates of exchange on New York. As this fall occurred at a time 
when not only the shipments of cotton to Europe were large, but 
the Northern manufacturers were laying in unusually large stocks, 
it was necessarily followed by an active shipment of gold to Charles- 
ton, Mobile, and New Orleans. This movement in ten days carried 
off by the known channels more than $3,500,000 in specie. The 
banks of course lost the greater part of this, and felt compelled to 
contract their loans. Capital at once became scarce and high, 
stocks fell rapidly, exchange was slow of sale and low, merchan- 
dise waiting to be exported was nearly immovable, and these 
results followed each other so quickly that by the 12th the 
panic was complete. Business was everywhere at a stand. Col- 
lections had become difficult at the East, and almost impossible at 
the West, where there was now an actual deficiency of currency 
having any tolerable degree of credit. The movement of produce 
slackened at the time when it should be at its height in anticipa- 
tion of the closing of navigation. Although existing stocks of 



THE CRISIS OF i860 303 

merchandise were not excessive in most branches, the impossi- 
bility of moving them stopped the orders for fresh supplies, and 
production diminished, thousands of workmen being thrown out 
of work every day. 

The terrors of this revulsion were heightened by the recognized 
dangers of the political situation. The possibility of some great 
convulsion in our civil order oppressed the public mind and made 
the future something portentous and incalculable. Actual dis- 
solution of the Union was not believed to be possible, nor was the 
approach of Civil War yet credited ; but what scenes of agitation 
might be before us, what changes might impend, and what loss 
of the great guarantees of liberty and property, what interruption 
of national growth and sundering of the bonds of sectional inter- 
course, — these were questions which filled every mind with fore- 
boding. This general condition of alarm was in itself enough to 
cut down every enterprise and to wither credit. But to this was 
added the direct influence of the absolute destruction of a large 
body of credit distributed through all branches of production and 
of internal trade. Great numbers of jobbing houses in the Northern 
cities had their entire capital at stake in the debts which were due 
to them from customers in the South. Many Southern jobbing 
houses were branches of firms established in the North whose 
solvency depended on receiving the collections from consumers at 
the South. Many Northern manufacturers, in different branches of 
industry, sent their entire product to the Southern market. In- 
deed, when it is remembered that the occupations of the South were 
chiefly agricultural, that its supplies of hardware, dry goods, clothing, 
and boots and shoes were drawn chiefly from the Northern centres 
of trade, and that it habitually required and obtained long credit for 
what it bought, depending on the coming crop for the means of 
payment, it is clear that the mass of debts due to the North, and 
all made of doubtful value by the possibility of a political overturn, 
was enormous. The rapid disorganization of the South had made 
it certain that payment of a large part of their debts must be 
delayed, if not finally lost ; and in the modern use of credit delay 
is fatal. Houses in the Southern trade, therefore, found their 
credit suddenly impaired. All paper resting in any degree upon 
Southern trade had upon it the taint of a rapidly increasing sus- 
picion. The panic grew in intensity from this cause day by day. 



304 ESSAYS 

Relief which might have been possible in an ordinary crisis be- 
came hopeless, for lenders were now not merely doubtful as to 
their security, but had the certainty that a large part of the paper 
offered them had become weak and perhaps worthless from a real 
cause. The lending of money by private bankers and discount 
houses came nearly to a stop from the unwillingness of lenders to 
venture upon long paper of any description, while at the same 
time call loans were to be had on tolerably easy terms. The banks 
restricted their discounts within the narrowest possible limits, and 
as they contracted their loans their deposits fell off and their specie 
melted away, leaving them to press still more heavily upon borrow- 
ers and to restrict their loans still farther. In short, they were once 
more in the false position in which they found themselves in Octo- 
ber, 1857, when they could neither discount nor refuse to discount. 

By the 17th of November the drain of specie to the South had 
stopped, exchange on New York in the Southern cities having 
taken an upward turn, partly under the influence of the shipments 
of specie which had been going on and which had given some ease 
to the Southern money market. But the panic in New York was 
no longer to be relieved by any single circumstance of this kind. 
Foreign bills fell to a lower point than ever, and the Atlantic, which 
sailed on Saturday the 17th, carried to England the news that 
bankers' bills on London sold with difficulty at 1.05 (the real par 
being 109J) and commercial bills at 1.00, with few buyers even at 
those rates. In this state of things the prices of merchandise were 
beginning to fall rapidly. 

This disastrous state of things was perhaps felt more severely 
at Chicago than at any other place in the West. The block in 
foreign exchange at New York prevented the possibility of realiz- 
ing on the immense crop which the West had been pouring 
toward the seaboard, and thus destroyed the means of payment, 
but did not remove the pressure of debt, while with the fall in 
prices the wealth of the West seemed to vanish. Exchange on 
New York had risen in Chicago to five to ten per cent premium 
with little demand, and the local currency had so depreciated that 
gold was sold at five to seven per cent premium. In Cincinnati, 
exchange was scarce, but lower, the local currency being more 
sound ; money was little demanded, said the papers of the day, 
because it was of no use to ask for it. 



THE CRISIS OF i860 305 

The business of the country was, in fine, at a dead-lock : the 
panic in the money market prevented the importers from buying 
bills for remittance abroad ; the impossibility of selling bills drawn 
against it stopped the sales of produce ; this destroyed the basis 
on which the West drew its exchange on the East ; the Western 
merchants being unable to sell their produce were unable to 
remit ; and the falling off in collections from the West intensified 
the pressure in New York. The machinery of internal circulation 
had stopped, and no one wheel could move until the others started. 
The case seemed hopeless unless some strong external force could 
give the desired impulse. This impulse some of the banks of New 
York determined to give, if possible, by making large purchases 
of exchange on their own account, in the hope that the movement 
of trade might thus be revived and some relief given to the general 
market, while they should themselves be able to secure the returns 
for the exchange in specie with only a few weeks' delay. Accord- 
ingly, on the 19th it was announced that several of the largest 
banks were ready to buy sterling bills to the amount altogether of 
,£500,000. The relief obtained from this measure, however, was 
not immediate. The banks found it difficult to secure the amount 
of first-class bills, and at the rates which they had expected, and 
were reported to have finally bought only to the extent of £60,000. 
Their action caused some movement by private parties, and thus 
helped the exchange market for the time, and caused a more cheer- 
ful feeling on the 20th. On the next day, however, there was a 
relapse, and the tone of affairs became more alarming than ever. 
It became plain that without immediate relief in the way of loans 
a large part of the customers of the banks must soon become in- 
solvent, for it was impossible for even the most prudent merchant, 
after selling his goods upon credit, to repay at short notice his 
borrowed capital. And it was further urged by the merchants 
that even if the banks were at any time justified in saving them- 
selves by breaking their customers, there was now no occasion 
requiring them to do so, for with the fall in exchange upon Eng- 
land and the cessation of the Southern drain of specie there was 
not only no demand which exposed them to any danger in case of 
an enlargement of their liabilities for the benefit of their customers, 
but there was every reason to look for an early and considerable 
flow of specie from Europe. The bank managers had, perhaps, 



306 ESSAYS 

learned something from the experience of 1857 as to the effects of 
an unrelenting contraction at such a moment. At any rate, they 
were not, as then, insensible to the appeals of their customers. 
Their resolution to buy exchange was an acknowledgment of a 
duty toward the community and evidence of a desire to perform 
it, and if they were slow in taking any more decided action, it was 
rather from the difficulty of devising any course to be pursued by 
fifty banks, each acting for itself, than from any indisposition on the 
part of the leading managers to meet their proper responsibility. 

The expedient to which the banks finally resorted for the relief 
of the community and for their own protection at this frightful junc- 
ture deserves careful attention. They now held in the aggregate an 
amount of specie which was equal to about twenty-two per cent of 
their cash liabilities. This was a scanty reserve, but still the amount 
was large enough to make it probable that if credit, and especially 
the credit of the banks, suffered no further shock, it might be pos- 
sible to tide over the emergency. But for this purpose it was 
necessary that the reserve should be treated as a genuine reserve, 
that is, as something to be used in pressing necessity, and not merely 
to be guarded, and that assistance should be freely extended to the 
public. In short, it was necessary that loans should be liberally in- 
creased, although this increase might be attended with the risk of 
a still further exhaustion of resources, in case depositors or note- 
holders should be led to demand specie. In the opinion of the 
more sagacious managers this risk was not great. The heavy fall 
of exchange had stopped the export of specie and made it certain 
that the flow of gold must set in from abroad, as was seen in 1857. 
The circulation of the banks was under no suspicion, and their 
general credit was secure, provided the credit of the mercantile 
community could be saved. There was reason, indeed, to expect 
that additional loans, being used in payments falling due at the 
banks, would be in substance and to a great extent a mere exchange 
of obligations and postponement of the time for payment. That 
this relief might be given, however, freely enough to quell the 
panic which existed and by sustaining the credit of individuals to 
sustain that of the banks themselves, it was necessary that it should 
be given by concerted action. Experience had shown that no 
mere general understanding was sufficient for this purpose. 
Among upwards of fifty banks, it was certain that, if expansion 



THE CRISIS OF i860 307 

should be undertaken without some practically binding arrange- 
ment, some would be found to adopt the selfish policy of leaving 
the burden of expansion upon their neighbors and using the oppor- 
tunity to strengthen themselves ; and that others would hesitate 
to go forward from fear of not being supported by their neighbors. 
In short, the banks felt the same necessity for some sort of disci- 
pline, which should hold in check the individual instinct of self- 
preservation, which a regiment feels when it is about to charge in 
battle. 

The existence of the Clearing-house Association offered the 
means of establishing this unanimity of action which should make 
the banks one for the time and enable each to act in full confidence 
of support. The vast amount of exchanges made by the banks 
through the Clearing-house, and the immense advantage of mak- 
ing these exchanges by the mere offset of mutual accounts and 
settlement of balances, instead of doing it by the laborious process 
of collection by each bank from every other, made the possibility 
of exclusion from the Clearing-house a severe penalty which few 
would care to brave. A plan of operation was therefore settled 
upon which should become binding upon all the banks in the Asso- 
ciation when adopted by three-fourths of them. By this plan, to 
which all the banks in the Association save one finally gave their 
adhesion, the banks agreed that for the purpose of enabling them 
to expand their loans, the specie held by them should be treated as 
a common fund, and if necessary should be equalized among the 
banks by assessments upon the stronger for the benefit of the 
weaker, and that for the purpose of settling balances between 
the banks, a committee should be appointed with power to issue 
certificates of deposit to any bank depositing with them adequate 
security in the shape of stocks, bonds, or bills receivable, and that 
these certificates should be received in payment by creditor banks. 
The effect of this arrangement was that any bank which experi- 
enced an unusual demand for specie was supported in meeting it 
by the whole of the common stock, and that the debt which it thus 
incurred it could meet by a pledge of its securities. Whatever 
course might be taken, each bank was as strong as the rest in 
specie, nor could any bank, by holding back its loans, strengthen 
itself at the expense of the others, since the specie which it might 
thus collect must by the agreement be held for the general benefit. 



308 ESSAYS 

And finally it was provided that after the 1st of February, 1861, 
any bank whose specie fell below one-fourth of its liabilities should 
cease discounting until that proportion was recovered, under the 
penalty of expulsion from the Clearing-house. 

Although this arrangement was favorably received by the 
public, and was indeed rightly regarded as the turning-point in the 
panic, it was the subject of much criticism. It was declared by 
many to be equivalent to the suspension of specie payments, since 
the debts of the banks to each other were not to be settled by the 
payments of specie but by the pledge of securities. But it was 
answered triumphantly by the bank managers that the power of 
the public to obtain payment of deposits or redemption of notes in 
specie remained unimpaired. So long as the convertibility of the 
bank-note was maintained, how could it be said that specie pay- 
ments were ever virtually suspended, although the banks should 
mutually forbear to demand specie from each other? The 
arrangement was in fact a temporary fusion of the fifty banks of 
the city in their relations with each other, but without prejudice 
to the rights of the public. If an analogy for it were sought, it 
might be found in the suspension of the act of 1844 for the relief 
of the Bank of England, and the consequent substitution of gov- 
ernment securities for bullion in the dealings between the two 
departments of the bank, the bank-note remaining convertible as 
before. 

All of the New York banks entered into this arrangement, 
except the Chemical Bank, an institution with remarkably large 
and steady deposits and small circulation, which preferred to be 
cut off from the privileges of the Clearing-house, rather than 
throw its large reserve of specie into the common stock. The 
effects of the combination were instantaneous. In the next week 
the banks increased their loans so rapidly that the average for 
the week rose by $7,000,000, and the panic, strictly speaking, 
came to an end. Nearly the whole of the additional loans 
went to swell the mass of deposits, with only an inconsiderable 
loss of specie. The expansion continued at a more moderate 
rate for four weeks longer until on the 2 2d of December the aver- 
age of loans for the week stood at $132,000,000, with rapidly 
increasing deposits and specie. From that point, under the 
natural influence of the revulsion, the demand for loans diminished 



THE CRISIS OF i860 309 

and specie accumulated rapidly, this movement going on far into 
the year 1861. The Boston banks on the 24th of November fol- 
lowed the example of the banks in New York so far as to agree 
in general terms to discount as freely as possible and to provide 
that banks owing balances in settlement at the Clearing-house 
might pay in their own bills to the extent of fifty per cent of the 
balances due, provided the bills paid did not exceed a certain 
amount, fixed in proportion to the capital of each bank, varying 
from one-tenth for the smallest banks to one-twentieth for the 
largest. The expedient of throwing their specie into a common 
fund was rejected by them, and they therefore failed in securing 
the unanimity of action which distinguished the conduct of the 
New York banks ; some of the Boston banks attempted to expand, 
but others contracted, and the result was a slow diminution of 
loans for some weeks, which bore with great severity on the mer- 
cantile public. With some loss of specie, however, and with the 
aid, it was said, of some forbearance by New York creditor banks 
in calling for balances due to them from Boston, the banks of 
Boston went through the panic without suspending specie payment. 
It was too late, however, or was for other reasons impossible, 
for banks in other sections to adopt the same course. On the 21st 
of November the Farmers' Bank of Virginia, a large institution 
with numerous branches, suspended specie payment and was fol- 
lowed by its neighbors on the next day. The Baltimore banks, 
which had been severely pressed for some days and had felt the 
symptoms of a run by their note-holders, suspended on the 2 2d, and 
the Philadelphia banks on the same afternoon resolved to take the 
same course. The St. Louis banks suspended with one exception 
on the 28th, the South Carolina banks on the 29th, and the Georgia 
banks on the 30th. Of these suspensions those of the Southern 
banks were in part the result of political calculation, it being 
desired to retain within control the specie which they held, and 
in part the result of the absorption of specie by individuals which 
had been going on through the South for some weeks. The 
Baltimore banks were driven to the same course by the action of 
the banks of Virginia which cut off a large share of the specie 
collections of the Baltimore merchants. Whether the Philadelphia 
banks could have held out longer or not may be a question, but it 
seems that their suspension, when it occurred, was more the result 



310 ESSAYS 

of a want of concert than of special weakness at that moment. The 
banks of Kentucky continued specie payments throughout this 
period of difficulty ; those of New Orleans did not suspend until 
September 1861, and then only, it was said, at the request of the 
Confederate government. 1 

The free banks of the Northwest suffered instant discredit from 
the development of the secession movement and the consequent 
decline of the securities upon which their circulation was founded. 
From July to December, i860, the bonds of several of the Southern 
states showed a loss of twenty to twenty-five per cent ; Missouri 
bonds in particular dropped from eighty to sixty-one; and the whole 
range of these securities, after a reaction in the early part of 1861, 
continued to fall without hope of recovery. The Auditor of Illi- 
nois refused in November, i860, to receive any more Missouri 
bonds as security for notes, the Chicago bankers began to throw 
out the notes of country banks known to have large deposits of 
Southern bonds, and the Bank Commissioners called upon thirty- 
three banks to deposit additional security — a demand which could 
not be complied with. Exchange upon New York rose in Chicago 
to eight or ten per cent, declining to five or six in the early part 
of 1 86 1. In May of that year the notes of nearly half of the Illi- 
nois country banks had been thrown out in Chicago and the dis- 
count on their notes ranged from twelve to twenty per cent. The 
legislature had already voted to receive only Illinois stocks on 
deposit from free banks in the future ; but this change came too 
late to save the people of Illinois from what Governor Yates, two 
years after, described as immense loss. The Wisconsin banks 
were also thrown into indescribable confusion by the collapse of a 
large part of their securities. In May, 1861, the Bank Comptroller 
of Wisconsin sold in New York for redemption purposes Missouri 
bonds at thirty-seven and one-half, Tennessee at forty-five and one- 
eighth, and North Carolina at fifty-six. Banks were closed in quick 
succession, leaving their notes outstanding, and in 1863 the comp- 
troller was redeeming — at rates under par and ranging as low as 
fifty — the notes of thirty-seven Wisconsin banks. Neither in 
Ohio nor in Indiana did the banks with secured circulation suffer 
as in Illinois and Wisconsin, although of the Indiana free banks 
many had to increase their securities to make good the loss on 

1 Bankers' Magazine, 1861-62, p. 393. 



THE CRISIS OF i860 311 

Missouri and Louisiana stocks, which were largely held by them, 
and as many as sixteen proceeded to withdraw their notes, a 
small number suspending altogether. In Missouri also, notwith- 
standing the loss of credit by the state and the depreciated local 
currency already noticed, the banks were able to meet the strain of 
the revulsion with a good face. They held a relatively strong coin 
reserve, and although their suspended debt was of serious amount, 
they were able to reduce their circulation and thus to bring their 
business into a condition in which they could await the issue of 
the war. 

The specie movement occasioned by the crisis in this country 
was larger in amount, but less serious in its consequences than that 
of 1857. It has already been remarked that so early as the middle 
of October exchange had fallen below the point at which specie 
could be profitably exported. Although there was a rally in the 
last part of the month, exchange was still heavy and shipments 
finally came entirely to a stand. The gold exported from New 
York, the chief point of specie shipments and imports, was only 
$740,000 for the months of November and December, i860, and 
$23,000 in January, 1861, against $7,190,000 in the same three 
months of the previous year. The decisive turn was given to the 
exchanges by the news carried to Europe by the Atlantic, which 
sailed on the 17th of November, when five days of panic had 
completely paralyzed the market for exchange in New York. 
The Atlantic reached England on the 30th, and on the next day 
the Europa sailing from Liverpool took as freight to New York 
$540,000 in specie. The tide soon began to flow with great 
strength, the Persia which sailed a few days later bringing over 
$3,000,000. In the three months after the flow of specie began the 
receipts of gold in New York from Europe amounted to $12,725,000, 
and the importation continued until the fall of 1861. The aggregate 
of specie imported in the fiscal year ending with June, 1861, was 
over $40,300,000, so that deducting the $23,800,000, exported 
chiefly in the earlier part of the year, the United States on the 
whole drew from abroad in this year $16,500,000 of gold. In 
no other year since the product of California became important 
had this happened. 

The first effect produced in New York by the measures taken 
by the banks of that city was to cause a general sense of relief 



312 ESSAYS 

and of returning hope, manifesting itself in greater ease in the 
money market and improved prices for stocks. Had the crisis 
been of the ordinary type, recovery would no doubt have dated 
from this point as in 1857. The period of revulsion must of 
course have been gone through, but, with the accumulation of 
capital, prices of good securities must have begun to rise at once 
and credit to regain its healthy condition. But the crisis of 
i860 was not of the ordinary type, and this fact the public 
were every day learning to comprehend more fully. The 
confidence imparted by the action of the banks was then 
but temporary. It was soon felt that the losses already ex- 
perienced from the secession movement in the South, and the 
greater ones yet to be expected, were not to be cured or averted 
by the mere expansion of loans. They involved a real loss of 
capital, and how far this might go could not be guessed. It 
was only certain that the movement was gaining ground, and 
that a revolution in the business of the country as well as its 
government became daily more imminent. After a few days, 
therefore, the advance in stocks which followed the union of the 
banks was lost under the increasing pressure in the money 
market, and prices then continued to decline until the early part 
of December, when they " touched bottom." Merchandise also 
suffered the same fall in the few weeks after the action of the 
banks. 

This continuous fall of prices after the 21st of November, it is 
to be observed, was not accompanied by any panic. Though the 
demand for loans was great, and private lenders were extremely 
reluctant to act, the banks were lending freely, and the appre- 
hension now felt was not that the means of payment should be 
unavailable, but that they should not exist. Assets of real value 
could now be used, though at some sacrifice ; but what assets were 
of real value was a matter of doubt. Settled gloom, therefore, 
took the place of that peculiar tension of feeling which is known 
as panic, and the country entered upon a revulsion in both domestic 
and foreign commerce, of distinctly different character from that 
which would have followed the panic under ordinary circum- 
stances. This difference was owing to the steadily increasing 
mass of Southern indebtedness, either repudiated or suspended in 
consequence of the movement for secession. The panic, although 



THE CRISIS OF i860 313 

short, had been of frightful severity, and recovery from its 
paralyzing effects must have been slow. It had not been caused, 
however, by any general unsoundness of business, the commercial 
and manufacturing interests had withstood the strain with some 
success, the demoralizing effects of specie suspension had been 
averted in the great financial centres, and if nothing more had 
happened, the return to a prosperous, although a reduced business, 
would have followed early and naturally. And there is evidence 
in the publications of the day that the observers of financial 
affairs were slow to admit that such a course of affairs was no 
longer possible. As winter advanced, however, the unwelcome 
truth forced conviction upon every mind that the business of one 
whole section must be struck out from all calculations of payment 
for the past and of production for the future. This was not the 
mere " shrinkage " in transactions caused by revulsion of the 
usual type, but the annihilation of resources belonging to mer- 
chants and manufacturers to the extent, as has been estimated, of 
more than $200,000,000. The pacification of political troubles 
might have checked and cut short this destruction ; their progress 
made it inevitable. The causes now at work, therefore, although 
connected with these from which the panic had sprung, were 
political and not financial. 

It is useless then to attempt to trace farther the course of 
recovery from the panic of i860. The steadily increasing effect 
of new and extraneous influences after the early part of December 
disguised the operation of the ordinary laws of finance and distorts 
their results. 



STATE BANKS IN i860 1 

The fifteen years which preceded the Civil War saw the currency 
of the United States established completely, and to all appearance 
firmly, upon the theories involved in the Independent Treasury 
system. A long period of fierce debate and struggle had ended 
with a declaration by the federal government, in the act of 
August 6, 1846, that in all its transactions specie alone should be 
received or paid out by its officers after April 1, 1847, and that no 
public moneys should thenceforward be deposited in banks. This 
absolute prohibition of all use of banks or of bank currency, fol- 
lowing the repeated and decisive defeat of projects for establishing 
a Bank of the United States, implied the renunciation of all 
responsibility for the banking system, on which the mercantile 
community continued to depend. The theory of the Whig leaders 
" that there are duties, devolving on Congress, in relation to cur- 
rency, beyond the mere regulation of the gold and silver coins," 2 
was rejected, and all except gold and silver was left to be regu- 
lated by the states at their discretion. It had become the estab- 
lished order of things, then, that the government should use coin, 
leaving the people to use either coin or such substitutes as they 
might prefer, and that the government should rely upon its own 
strong box, leaving the people to set in operation such local insti- 
tutions of credit as necessity or ingenuity might suggest. The gold 
of California and the rush of industrial growth stimulated by it 
came in good time to support this crude arrangement, and in i860 
it appeared, like many other things in our system, if not beyond 
criticism, at least safe from attack. 

1 The last three essays included in this volume are a fragment of a larger whole de- 
signed to present a history of the national banks. The survey of state banks in i860 
would probably have been somewhat expanded, if we may judge from the absence of 
reference to the banking system of Louisiana. In scope as well as in other respects the 
essays on " The Establishment " and on " The Circulation of the National Banks " were 
left by Professor Dunbar in a state more nearly approaching completion. 

2 Webster, " Works," iv. 328. 

3H 



STATE BANKS IN i860 315 

Under such circumstances the legislation of the states with 
respect to banks lost none of the variety which had characterized 
it from the first. From 1846 to i860 the state legislatures con- 
tinued to act upon this important subject without concert and upon 
no common principle, but simply as they happened to be moved 
by the traditions, habits, or supposed needs of any particular com- 
munity, sometimes under the stimulus of party prejudice and 
sometimes in obedience to the local craze of the moment. In 
some sections groups of states finally adopted tolerably similar 
systems, showing progress toward the formation of a consistent 
policy over considerable areas ; in other sections no such crystal- 
lization was visible. The history of the state bank systems, there- 
fore, is a mass of disconnected details, from which a movement of 
some importance within narrow geographical limits is evolved here 
or there, but with no important general trend. For the purpose 
of making a general survey of the state bank systems, then, it is 
convenient to confine ourselves to a survey of those banks at some 
given epoch. The beginning of the year i860 is selected as the 
best date for such a survey, because a costly experience had then 
brought state banking on the whole to its best condition prior to 
the Civil War. The wreckage of the revulsion of 1857 had then 
been cleared away, the business of the country had resumed its 
activity, and the sinister influence of the impending political crisis 
was not yet felt. 

It is probably impossible to obtain at this date precise informa- 
tion from all of the states as to the number and condition of the 
banks then existing. Some states maintained a careful supervision 
over their banks, requiring the collection and publication of accounts 
at stated times, but others made no such requirements, and in others 
still the publication was made too negligently to be satisfactory. 
The Secretary of the Treasury had been required ever since 1832 
to lay before the House of Representatives annually such returns 
of state banks " as may have been communicated " to the state 
governments during the year, and in default of such statements to 
present " other authentic information " ; but the returns thus com- 
piled, although exact for some of the states, do not command con- 
fidence as regards others. The returns published by the Treasury 
may, however, be corrected and completed in some cases by the 
figures collected and periodically revised for the Bankers' Maga- 



3i6 



ESSAYS 



sine, that publication having special reasons for securing absolute 
accuracy if possible. 1 From these sources it appears that in Janu- 
ary, i860, there were at least 1590 banks in twenty-nine states and 
the District of Columbia, besides seven in the territories of Kansas 
and Nebraska. No banks then existed in Arkansas ; and the consti- 
tutions of Texas, California, and Oregon forbade the establishment 
of any bank of issue. The distribution of these banks among the 
states points plainly to differences of legislative policy, as well as 
to differences in population, wealth, and economic conditions ; but 
the most striking facts in this respect are the concentration of 
more than half of the banks, both in number and in capital, in 
New England and New York, the small number of banks in the 
planting states, and the great irregularity of their distribution in 
the West and Northwest. 2 

When we examine the laws under which the several states had 
organized their banks, it is difficult to find any basis for systematic 
arrangement and review. Not only did the legislation of one 
state differ from that of another in its general effect, but, taking 
the states individually, there were in some states banks established 
under several different systems, and in others, where the legislation 
permitted a like diversity, the banks had, in fact, organized wholly 
or chiefly under some one preferred system. The tedium of an 
examination of the laws, state by state, may, however, be avoided 
in part, if we begin by noting the fundamental distinction between 



1 See table in Bankers' Magazine, April, i860, p. 764, giving figures for all the 
states for January, i860 ; observe also the remarks on page 763. Page 975 gives also, 
for June, i860, a list of all the banks by name, the names of their officers, and the 
amount of their capital, showing the precision of the information collected. 



3 New England 
New York .... 
Middle and District of Columbia 
South Atlantic 
North Central 
South Central and Missouri . 



No. of Banks 
507 



Total 



301 
180 

153 
287 
162 

I590 



Capital 
000,000 omitted 

£123 

III 

48 

48 

25 

55 
#410 



Wisconsin had 104 banks, Illinois 72, Ohio 53, Indiana 37, Iowa 13, and Michi- 
gan 4. Of the banks in the South Central states, those of Kentucky and Louisiana 
represented $33,000,000 of capital. — Bankers' Magazine, 1859-1860, p. 764. 



STATE BANKS IN i860 317 

the banks organized under special charters and those which were 
generally known as free banks. 

In the earlier part of the century the only method of in- 
corporation practised by any legislature was incorporation by 
special charter. This method implied the exercise of legisla- 
tive judgment as to the need for the establishment of a bank 
in the particular locality and as to the fitness of the persons 
applying, and in many states it continued to commend itself to 
public approval down to the Civil War. The state, thus incorpo- 
rating its banks singly and after inquiring as to the merits of each 
one, in many cases established general regulations applicable 
to all its charter banks, prescribing the limits within which the 
business of each should be confined and the measures to be taken 
for supervision or public information, and strengthening its system 
by such other safeguards as the particular constituency demanded 
or would bear. To this method of incorporation by special charter 
was added the method of incorporation by general act, partly as 
the result of a desire to systematize banking and partly under the 
influence of a growing preference for general legislation rather 
than special in all possible cases. New York had undertaken in 
1829 the doubtful experiment of establishing a safety fund, to be 
fed by annual contributions from all banks organized under the 
system, and to be used for the payment of the debts of any such 
bank becoming insolvent. Without waiting for the catastrophe 
which ultimately disclosed the weakness of this system, the legis- 
lature in 1838 adopted the expedient of requiring any bank sub- 
sequently established to deposit with the State Comptroller 
securities of specified kinds, in amount sufficient to cover the notes 
to be issued by the bank. Making this provision for the safety of 
the circulation, it was easy to provide also by general law that any 
body of applicants, upon complying with the terms of the act, 
should be organized with banking powers ; and thus New York 
set on foot what became known in many states as the free banking 
system, as distinguished from the system of special charters. The 
plan for a secured currency might easily have been grafted upon 
the regulations for banks under special charters ; but in fact this 
seldom took place, and the line of demarcation between the free 
banks and the charter banks was in most states maintained to the 
last as it had been first drawn. The free banks were organized 



318 ESSAYS 

under a general law, with some plan for a uniform secured circu- 
lation, while the charter banks, organized by special acts, presented 
no such uniformity of security. 

It was in New England that the chartered banks were strongest 
in i860. Having a comparatively dense population, active manu- 
facturing and commercial interests, and large accumulations of 
capital, several of those states had provided themselves with banks 
early and rapidly. The legislatures had for the most part granted 
charters with great freedom, but had surrounded the banks by 
rather elaborate general regulations, which on the whole conformed 
to a common type. The New England chartered bank was an 
incorporated company, having tolerably ample banking powers, 
using its funds chiefly and often exclusively in the purchase of 
commercial paper, and depending for its strength on the solidity 
of this investment. In Maine and Massachusetts the expansion of 
its credit by any bank was limited by the prohibition of loans in 
excess of double the capital, and by a limit upon the debts due by 
the bank. In most of the New England states, however, the 
chief effort of legislation was to restrict circulation, this form of 
liability still continuing, down to i860, in all these states except 
Massachusetts, to be more important in amount than the deposits. 
In pursuance of this policy New Hampshire, Massachusetts, and 
Rhode Island limited the circulation of the bank to the amount 
of its capital, and Rhode Island in 1859 limited it to sixty-five 
per cent of the capital ; Vermont limited all debts except for de- 
posits to twice the capital; and Maine limited the circulation to 
the amount of capital and also required that all circulation in 
excess of one-half of the capital should be protected by a reserve 
of one-third its amount in specie. In addition, New Hampshire 
and Massachusetts gave to the notes of any bank a first lien on 
its assets, and Maine made the stockholders individually liable in 
proportion to their stock for unpaid notes. 

In every New England state the legislature had placed the 
banks under the supervision of one or more Commissioners, armed 
with certain powers of inspection and investigation, and had provided 
for returns of the condition of every bank to be made to the state 
authorities. As to the frequency of such returns, however, there 
was no uniformity, and the requirements varied from the moderate 
demand of Vermont for a full exhibit of affairs to the Commis- 



STATE BANKS IN i860 319 

sioner at his annual visit, to the requirement of Massachusetts for 
sworn returns to be given in weekly by Boston banks and monthly 
by all others, and then to be published in abstract by the Secretary 
of the Commonwealth. The great concentration of the business 
interests of much of New England in the city of Boston, however, 
made up in part for the laxity of the provisions for publicity made 
by some of the states. The great majority of the New England 
banks were under some pressure from Boston correspondents, 
prompt to require payment and keen to discern signs of weakness. 
There had grown up, moreover, the system of the Suffolk Bank, 
so often described, under which the New England banks found 
themselves compelled to provide for the daily par redemption of 
their notes in Boston. 1 This system, originally introduced in 
order to free the city circulation from the excessive issues of 
country banks, and maintained for nearly forty years, had finally 
become more efficient than any legislative provision in keeping 
the currency of New England sound and uniform. 2 Country banks 
were often made uneasy by the strict requirements of an extra- 
legal arrangement, forced upon them by an irresistible power; 
but the result was that their issues, being kept within legitimate 
limits, had unquestioned credit throughout New England, were at 
no greater discount in New York than the secured notes of the 
country banks of that state, and were even taken to the West to 
be used in making purchases of produce in the fall of the year. 

It cannot be said that the New England system was at any 
time strong in specie. In the years 1859 and i860 the specie in 

1 An account of the Suffolk Bank system is given by Knox, " History of Banking in 
the United States," published in 1900. D. R. Whitney, "The Suffolk Bank " (1878), is 
a full account, from official sources, by the president of the bank. Nathan Appleton, 
"Remarks on Currency and Banking" (1841), compendiously describes the method 
followed : " The country banks are invited to keep a fund in deposit at the Suffolk bank 
for the redemption of their bills. If they decline, the bills are sent home for payment, 
in which case nothing but a legal payment in coin will be received. The trouble attend- 
ing this mode of payment soon induces the bank to yield to its true interest and keep up 
the deposit. . . ." The deposit required over $2000 for banks with capital not exceeding 
#100,000, with an increase for larger capital. At its height the daily redemption by the 
Suffolk Bank averaged not far from #1,300,000. The establishment of the Bank of Mutual 
Redemption in 1858, having country banks among its stockholders, compelled a division 
of the business, which finally came to an end with the disappearance of notes issued 
under state legislation. 

2 The Massachusetts law of 1843, which forbade any bank to pay out notes not its 
own, no doubt strengthened materially the system already established. 



320 ESSAYS 

New England banks amounted to less than one-eighth of their 
liabilities, and the holdings of single banks were often pitiful in 
amount. And yet the system was strong in credit. Excessive 
issues were quickly and rigidly checked ; the commercial relations 
of the region did not subject it to sudden or intense demand 
from outside ; and the community felt confidence in the value 
of assets which were made up of the paper created in a regular 
and prosperous business. The use of specie was economized 
almost to the last degree, a smoothly working credit, produced 
in response to the regular demands of business, was substituted for 
coin, and yet the whole was kept at the specie standard by the 
influence exerted at the central point. The system was not strong 
enough to stand by itself when the credit system in other parts 
of the country gave way, and still less to give any effective sup- 
port to others under such conditions, as was shown by the suspen- 
sion of the New England banks immediately following the 
suspension of those in New York City, both in 1857 an d in 1861. 
But leaving out of view the failure on these two occasions, of 
which one was a world-wide financial catastrophe and the other 
was the crisis of a nation's history, the people of New England 
found themselves in general well served by their banks, and felt 
little disposition for change. The free banking movement, to 
which New York gave so strong an impulse, had never made any 
strong impression in the New England states. Vermont and Mas- 
sachusetts had passed general banking laws providing for secured 
notes in 185 1, and Connecticut in 1852, but their example was not 
followed by their neighbors. Moreover, in each of these states the 
legislature continued to grant special charters upon application, 
and no free bank was established in Vermont or Connecticut. Mas- 
sachusetts established none until i860, when seven banks under 
the general law went into operation, six of which were placed in 
Boston and one in Cambridge. Whatever this sudden movement 
may have betokened, it was speedily lost sight of in the greater 
changes brought by the war, and the fact remains that the 
chartered banks of New England retained almost exclusive posses- 
sion of the field of banking in those states, until they were 
replaced by national banks under the acts of Congress. 

Most important of all the states, as regards the number and 
capital of its banks, was New York. The Manhattan Company 



STATE BANKS IN i860 32 1 

and the New York Dry Dock Company, incorporated near the 
beginning of the century with perpetual charters, continued their 
business in i860, under the general regulations imposed upon all 
banks by the statutes; banks incorporated before 1829 with char- 
ters for limited terms were still in existence ; banks incorporated 
between 1829 and 1838 issued notes under the Safety Fund system, 
imposed in the former year upon banks thereafter chartered. This 
system, requiring of every bank a contribution equal to three per cent 
of its capital for the establishment of a common fund, to be made 
good by renewed contributions if impaired, was intended to secure 
the notes of the contributing banks by giving them a lien on the 
fund. It was found in 1841, however, that by a singular oversight 
the law had been drawn so as to charge the fund with all the debts 
of an insolvent bank, and not with the notes only, and before the 
legislature was ready to apply a remedy, ten banks had failed and 
had left to their creditors claims upon the Safety Fund. The legis- 
lature, in 1842, changed the liability of the fund so as to give the 
note-holders a preferred claim upon it ; the state undertook, more- 
over, to meet the claims left behind by the insolvent banks, pro- 
viding for its own reimbursements out of the future contributions 
of the banks ; but the Safety Fund system had lost its vitality, and 
in 1 860 was little more than a name. A few banks remained, hold- 
ing charters which were to expire not later than 1866, but the larger 
number had taken refuge under the free banking system. 

The "free banks," or banks organized under the general bank- 
ing law of 1838, and its amendments, had come to hold in i860 by 
far the most important place in New York. Of the banking capital 
of the state, amounting to nearly $1 12,000,000, more than ninety per 
cent was organized under the general law ; and of the $70,000,000 
of this capital, belonging to the banks in New York City, more than 
ninety-two per cent. As the limited charters of the incorporated 
banks expired free banks filled the place, and thus, omitting the 
two cases of perpetual charters, the banking system of the state 
promised in a few years to pass under the general law. 

The details of the New York free banking system require 
little description or comment, except in two or three particulars. 
The fundamental idea of the law, as has already been seen, was to 
insure the solvency of all bank-notes issued under its provisions, 
by compelling the deposit of sufficient security in the hands of a 



322 ESSAYS 

public officer. For this purpose the law, in i860, after some sin- 
gular changes of policy, admitted stocks of the United States and 
of New York, and also mortgages upon real estate to the extent 
of one-half of the amount to be secured. Uniformity of security 
naturally carried with it the idea of unrestricted circulation within 
the limits of the state, and the law therefore contemplated the in- 
discriminate use of each other's notes by the free banks, allowing 
any bank to pay out the notes of any other which it was willing to 
receive at par. A safeguard against the risks involved in these 
arrangements was provided, however, by the early requirement of 
the redemption of notes in the principal cities, and by the final 
establishment in New York City of a system similar to that of the 
Suffolk Bank. 1 

In its earlier years this system passed through some trying 
periods. In 1844, out of ninety-three banks organized under it, 
twenty-six had failed, and their circulation had been redeemed at 
an average discount of about twenty-five per cent. But as early as 
1850 the law of New York had become a model for other states, and 
in i860 the banks organized under it had a credit which carried 
their notes easily into adjoining states, and often in the course of 
trade into the Northwest. This credit was probably due, not so 
much to the terms of the law, which (as in the admission of mort- 
gage security) sometimes passed the bounds of prudence, as to the 
reenforcement of the law by a generally strict and vigilant admin- 
istration, and to the influence exerted by the city banks. As early 
as 1 85 1 the banks of New York City found it for their interest to 
organize thoroughly the system of central par redemption of coun- 
try bank-notes; and in 1853 they established the Clearing-house 
and thus brought every one of their own number to a strict daily 
account. 

The free banking system, with provision for a bond-secured 
note issue, was followed in other states in such rapid succession 
in the later fifties as to suggest the probability that had not the 
normal course of development been interrupted, the system might 
soon have become general. 2 At its best in New York, the system 

1 A similar step was taken by the Philadelphia banks in 1858, but it was given up 
after a short trial. Bankers' Magazine, 1859-1860, pp. 13, 149. 

2 The following states had passed free banking laws down to i860 : Vermont, 
Massachusetts, Connecticut, New Jersey, Pennsylvania, Virginia, Tennessee, Florida, 
Louisiana, Ohio, Indiana, Illinois, Wisconsin, and Iowa. 



STATE BANKS IN i860 323 

was from its nature defective, since under its provisions real elasticity 
of note issue was nearly if not quite impossible. In many of the 
states, moreover, and particularly in the Northwest, it did not even 
secure that safety which is the sole virtue of a bond-secured circu- 
lation. It is not possible to determine how many of the seventy- 
four banks of Illinois and the one hundred and nine banks of 
Wisconsin were really at the beginning of i860 anything more 
than establishments for the issue of notes upon speculative securi- 
ties. 1 In each case the law of the state allowed the issue of notes 
upon the bonds of any state paying its annual interest, and in each 
the banks had convinced the state officers as to the soundness of a 
great variety of bonds. The favorite security for this purpose was 
for the time the six per cent bond of Missouri. That state was 
issuing its bonds in payment for railway construction, and the 
rates in the market, which early in i860 were not far above 
eighty, indicated that the supply was not easily absorbed. To 
make a deposit of the bonds under the Wisconsin law and 
to take out an amount of notes equal to their average value in. 
New York for the preceding six months, appears to have been 
an easy method of obtaining an advance, which might be left to 
throw the burden on the note-holder in case the bonds fell still 
further. Other issues of Southern and Western bonds appear to 
have been used in the same manner, bringing into existence a mass 
of currency protected by no real redemption by the issuing bank, 
and with doubtful security in the hands of the state. Public 
indignation found its vent in epithets of great freshness and vigor 
applied to the notes, but the notes continued to circulate. It was 
generally recognized that Illinois and Wisconsin did not use a 
currency of specie value; it was hard even in Chicago to buy gold ; 
and the propositions made at intervals for some scheme of redemp- 
tion were generally limited to redemption in exchange upon some 
more fortunate state at "reasonable rates." The free banks in 
Indiana were apparently disposed to follow the example of those 

1 It was stated in a circular of Chicago bankers in i860 that more than half of the 
Illinois banks were banks of circulation only, doing no business in their nominal 
location. Bankers' Magazine, January, 1861, p. 585. The Comptroller of Wisconsin, 
in January, i860, named 15 banks in that state as irresponsible, 13 having no place of 
business and the other 2 being apparently mere places of issue. That these were the 
only Wisconsin banks having little or no foundation in legitimate business is highly 
improbable. 



324 ESSAYS 

in Wisconsin and Illinois. They, too, held Missouri and Southern 
bonds freely, and sought to devise some plan for preventing the 
frequent return of circulation for redemption, but could agree upon 
nothing except common hatred for the Bank of the State of 
Indiana, which pushed them hard by the regular return of their 
notes. 1 As for Missouri itself, the currency there was freely recog- 
nized as inconvertible. The bank commissioner of the state early 
in i860 reported that bank-notes were at a discount of one or one 
and one-half per cent compared with gold, and one per cent below 
the notes of the state banks of Indiana and Ohio and the banks of 
Kentucky, Tennessee, and Louisiana. The state itself had paid 
one and one-half per cent for exchange in order to remit money 
for its annual interest due in New York ; and in March the 
Chamber of Commerce of St. Louis resolved that it was necessary 
to return to the specie basis. 2 

The difference in the value of local currencies, which thus 
culminated in the West, necessarily showed itself in published rates 
of discount on " foreign " notes in most of the principal cities. In 
some cases notes were sent in large sums to be put into circulation 
at a distance from home ; in other cases they found their way to 
distant places, in small amounts in the pockets of individuals. In 
either case they often fell into the hands of the dealers in " uncur- 
Tent money," who carried on a profitable business in buying such 
:notes, often at low rates, and either selling them for remittance, or 
.sending them home, to be redeemed or to be put into circulation 
anew, as the case might be. But notwithstanding the discount 
upon " foreign " notes when bought or sold, they made their way 
into circulation, and sometimes to a serious extent, whenever the 
local banks failed to enforce a rigid exclusion. Complaint was 
made that Missouri notes accumulated in Cincinnati, 3 the banks 
there preferring to pay them out rather than incur the expense of 
sending them home, and Illinois and Wisconsin notes overran the 
whole Northwest. 4 That all this confusion implied great in- 
convenience and certain loss for the unwary, even in dealing 
with genuine notes, is clear. But there was also an added dan- 
ger arising from the multitude of counterfeited notes. The art 

1 Bankers' Magazine, 1859-1860, p. 913. 2 Ibid., pp. 811-817. 

3 Ibid., p. 152. 

4 " Iowa State Bank and Western Banking," in Bankers' Magazine, 185 9-1 860, p. 609. 



STATE BANKS IN i860 325 

of bank-note engraving was then well advanced, as the natural 
result of the needs of a multitude of banks having different plates. 
The business of engraving had been concentrated in a few hands, 
and much highly creditable work was produced. The counter- 
feiter found his opportunity, however, in the vast variety of the 
notes in use, and in the probability that no person would be 
familiar with the appearance of many issues. Only the expert 
could know the characteristics of a multitude of plates, and detect 
at sight the variation from the original, which might be as difficult 
of precise definition, and yet as real, as the difference in the features 
of two brothers. A pamphlet bank-note detector was a part of the 
outfit of every well-provided counting-room. The published detect- 
ors rivalled each other in the completeness of their information, 
and the test of latest counterfeits was a valuable contribution regu- 
larly made by the financial publications. The New England banks 
had an efficient Association for the Suppression of Counterfeiting, 
and another went into operation in i860 in Philadelphia. 1 But no 
small part of the people found themselves frequent losers by imita- 
tions of a currency to which they could apply no certain test and 
for which they could obtain no substitute. 

The free banking system, in some of the Western states, found 
a formidable rival in the state banks organized on the model 
adopted by Indiana in 1834. After some unsatisfactory adventures 
in banking, Indiana, in that year, in view of the probable disappear- 
ance of the Bank of the United States, instituted a system under 
which local banks established in different parts of the state, as 
branches of an organization to be known collectively as the State 
Bank of Indiana, were to be placed under the supervision of a 
central Board of Control. The capital of any board was to be 
subscribed in equal parts by the state and by individuals, the state 
also lending its credit to enable individuals to make full payment 
for their shares in cash. Prudent management of an essentially 
sound institution brought the State Bank safely through the re- 
vulsion of 1837, though, like banks throughout the country gen- 
erally, it was obliged to suspend specie payments, and it carried 

1 The New England Association for the suppressing of counterfeiting " paid for 
sentencing" two hundred and twenty-eight persons during the four years 1858 to 1861. 
It received an annual subsidy from the state of $1500. For its report for 1859, see 
Bankers' Magazine, 1859-1860, p. 705. 



326 ESSAYS 

on a profitable business, enjoying high credit and performing valu- 
able public service until the expiration of its charter in 1857. 

To take its place a new bank was chartered in 1855, organized 
upon a similar plan, but having all its capital supplied by indi- 
viduals, and went into operation at the beginning of 1857, under 
the name of the Bank of the State of Indiana. The act of incor- 
poration provided for opening fifteen to twenty branches 1 in dif- 
ferent parts of the state, every branch to have a capital of at least 
$100,000 and the aggregate being limited to $6,000,000. Every 
branch had its own board of directors and its own stockholders, 
among whom its profits were to be divided ; but although distinct 
from each other the branches were not independent. Over them 
all was the bank, supported by proportional assessments upon the 
branches, represented by a board of directors, of whom four were 
elected by the legislature and one by every branch, and existing 
for the purpose of inspecting and controlling the branches. The 
directors of the bank fixed the number of directors for every 
branch and appointed two among them. They could also restrict 
the discounts of any branch to one and a quarter times its capi- 
tal ; and although they could not compel the transfer of capital 
from one branch to another, they had authority to close any branch 
after the first year, if it did not earn six per cent. In addition to 
these guarantees against mismanagement and to the further secur- 
ity afforded by ample provision for reports from all and for both 
stated and discretionary examinations by the central board, the 
branches were made liable for each other's debts, and the stock- 
holders were also made personally liable to an amount equal to 
their stock. Notes for circulation were supplied to the branches 
by the parent bank, the issue being limited to twice the capital of 
the issuing branch ; and the suspension of specie payments was 
forbidden under a penalty of heavy interest to the holder of notes 
on which payment should be refused or delayed. The average dis- 
counts of any bank were limited to the amount of its deposits, and 
two and a half times its capital and some strict regulations were 
prescribed as to the kind of loans to be made. 

The Bank of the State of Indiana was therefore a cluster of 
banks submitting to mutual inspection and control, — for the 

1 The law provided for the division of the state into " not less than fifteen nor 
more than twenty districts," and the larger number was in fact taken. 



STATE BANKS IN i860 327 

parent bank was in fact the representative of all, — and accepting 
mutual responsibility for debts. The organization, then, was 
essentially conservative, and its cautious movement lost nothing 
in steadiness under the firm hand of Hugh McCulloch, its first 
president. It passed through the crisis of 1857 without discredit, 
and in i860 was recognized as a sound and valuable system, 
under which healthy business and prudent management supplied 
all needful guarantees for every class of creditors. 

Ohio followed the example of Indiana in 1855, by incorporating 
the State Bank of Ohio, also a group of closely allied banks, with 
a maximum capital of $6,150,000. In its general characteristics 
the Ohio State Bank differed but little from the Indiana model, 
except that instead of making the branches liable for each other's 
obligations, the Ohio system instituted a Safety Fund, to be held 
by the central Board of Control and supported by a contribution 
required from every branch to an amount equal to ten per cent of 
its circulation. The branches were required to receive each other's 
notes at par ; the issue of each branch was limited to twice its 
capital if this did not exceed $100,000, and in a descending ratio 
for any additional $100,000; and the Board of Control could 
require any branch to reduce its circulation within safe limits. The 
liability of stockholders was limited to an amount equal to one- 
third of the capital paid in. To these regulations and to some 
restriction upon the indebtedness of any branch beyond its circu- 
lation and deposits, the Ohio system added the requirement of a 
reserve of thirty per cent of the amount of notes outstanding. 
Of this reserve at least one-half was required to be in coin and for 
the remainder the branch was allowed to count cash deposits in 
New York, Boston, Philadelphia, or Baltimore as the equivalent of 
coin. Organized upon this plan the State Bank of Ohio had in 
i860 thirty-six branches. The system was in strong condition and 
good credit, and well able to resist the approaching convulsion. 

Iowa began its life as a state in 1846 under a constitution 
which in one section forbade the creation of any corporation with 
the privilege of issuing notes " to circulate as money," and in 
another forbade the creation of any " corporations with banking 
privileges." The necessities of modern life, however, and the 
example of Indiana and Ohio wrought so powerfully upon Iowa, 
that in the revised constitution of 1857, after providing for the sub- 



328 ESSAYS 

mission of all acts relating to banking corporations to popular 
vote, express authority was given to establish a state bank with 
branches, to be founded on a specie-paying basis and with a 
mutual responsibility among the branches for each other's circu- 
lating notes. Under this authority the legislature in 1858 incor- 
porated the State Bank of Iowa, with a possible aggregate capital 
of $6,000,000, with the capital of each branch limited to $50,000 as 
its minimum and $300,000 as its maximum, and with the same 
concentration of supervisory power in a central board of directors 
as in the State Banks of Indiana and Ohio. A Safety Fund, 
amounting to one-eighth of the circulation, was established in the 
hands of the parent bank, and the circulation of every branch was 
limited in proportion to its capital, — on the first $100,000 to 
double the amount, and so with a descending scale for additional 
amounts of capital. A reserve of coin equal to one-fourth of the 
circulation was required, and also a similar reserve in current funds 
for the deposits. Any branch refusing to pay its notes in coin on 
demand was to be declared insolvent, and the State Bank was 
at once to take possession of its effects, in order to apply the 
Safety Fund, or enforce the mutual responsibility of the branches. 
Behind this responsibility lay the personal liability of all stock- 
holders to an amount equal to their stock. As a security for gen- 
eral soundness the law limited the indebtedness of any branch 
beyond its circulation and deposits, and forbade loans upon paper 
having more than four months to run. It forbade any branch to 
issue the notes of any other, and required all to take each other's 
notes at par ; but it permitted the circulation of notes received in 
payment of debts, if redeemable in gold and silver and received in 
the regular course of business, although issued by banks out of 
the state. In many particulars the Iowa law followed closely pro- 
visions of the laws of Indiana and Ohio, and, as in those cases, the 
result was the establishment of a solid institution maintaining its 
own credit and strengthening that of the community in which it 
was established. 

So strong was the impression made by the group of state banks 
on what we may call the Indiana model, that in 1861 the legisla- 
ture of a fourth state, Illinois, prepared to adopt the system, hav- 
ing apparently lost all hope of a thorough reform of the free 
banks. The act for the establishment of the Union Bank of 



STATE BANKS IN i860 329 

Illinois, passed February 20, 1861, proposed a group of banks 
collected around a central board with mutual responsibility and 
with strict provision for specie payment. Many of its sections 
were taken from the Indiana statutes with little change, and in 
general promised the same rigorous and prudent management. 
It failed, however, to secure a majority when submitted to popular 
vote in November. The people of Illinois at that juncture felt 
a reluctance, perhaps reasonable under the circumstances, to 
commit themselves further on the subject of banking. 



THE ESTABLISHMENT OF THE NATIONAL BANK- 
ING SYSTEM 1 

The plan of establishing a system of national banks, whose 
notes should take the place of those issued by the state banks, was 
first presented in definite shape in the report of the Secretary of 
the Treasury, at the beginning of December, 1861. Mr. Chase 
started in his discussion of the subject from the consideration 
that by some process the advantage of issuing a paper circulation, 
amounting to not far from $150,000,000 in the loyal states, ought 
to be transferred from the issuing banks to the government, and 
that the moment was opportune for such a change. He referred 
to the lack of system in the existing circulation, the insecurity of 
the bank-notes, the heavy losses suffered by the public, and espe- 
cially to the recent misfortunes of banks in the Mississippi Valley, 2 
to enforce upon Congress the duty of protecting the public from 
such evils in the future. Two methods were suggested by him, 
in which all the objects aimed at in the proposed reform might 
be attained, — first, the issue of United States notes in place of 
bank-notes ; and second, a national system for the issue of bank- 
notes, to be redeemed by the issuing banks, but secured by the 
pledge of United States bonds. The plan of issuing United 
States notes Mr. Chase rejected, believing that its possible dis- 
asters far outweighed its probable benefits. It is interesting to 
observe, in view of what soon followed, that the possible disasters 
which so powerfully affected his judgment were, the issue of notes 
under great temptation without adequate provision for redemption, 
the risk of "a depreciated, depreciating, and finally worthless 
paper money," and "the immeasurable evils of dishonored public 
faith and national bankruptcy," all then being "possible conse- 
quences of the adoption of a system of government circulation." 3 
Mr. Chase turned, therefore, in accordance no doubt with some 

1 See note, p. 314, above. 2 Ibid., p. 310. s Finance Report, 1861, p. 18. 

330 



ESTABLISHMENT OF THE NATIONAL BANKING SYSTEM 331 

predilections as well as with logic, to the second plan, a secured 
national bank currency, and recommended this for adoption by 
Congress. 

A bank currency thus secured, Mr. Chase was careful to point 
out, besides its advantages of uniformity and security, would also 
offer the further advantage of a large demand for government 
securities and of facilities for obtaining the loans required by the 
war. In addition it would strengthen and diffuse the interest in 
preserving the Union, by making the government stocks the 
basis for the circulation in general use, and would also secure 
equality of value for the paper currency in every part of the 
Union. The device of securing bank-notes by a pledge of public 
stocks had been shown to be practicable and useful by the experi- 
ence of New York and of some other states, and notes issued upon 
this system would now have a solid basis, in the large amount of 
specie retained in the United States by the requirement that 
duties on imports should be paid in coin. To these considerations 
it was wisely added that by offering inducements to existing sol- 
vent institutions to adopt the national system, the transition from 
a heterogeneous and unsafe currency to one which should be 
uniform and sound could be effected almost imperceptibly and 
the evils of a great and sudden change could be avoided. 

But although Mr. Chase believed that this plan might be per- 
fected and passed by Congress before the end of the session of 
1 861-1862, and that it might be serviceable in obtaining the loans 
needed for the current year, it was after all a leisurely expedient 
for filling the treasury of a country in the throes of civil war, and 
events were already moving too fast for his calculations. Although 
his report made no reference to any immediate pressure on the 
Treasury and no suggestion of any new expedient for its rapid 
replenishment, the suspension of specie payment had already 
become as nearly certain as any future event can be. By some of 
the bank managers suspension had been contemplated for many 
weeks as the probable result of the locking up of their resources 
in government bonds and the gradual dissipation of their reserves 
by payments to the Treasury. By the first week in December this 
double process was so far advanced and the public disquiet was so 
great as to leave no doubt as to the issue in the minds of cool 
observers. The shock to credit was precipitated by a sudden alarm 



332 ESSAYS 

as to possible war with England, and after some struggle the banks 
suspended on the 30th of December — earlier than they might 
have done had no special strain come upon them, but, after all, 
under the pressure of an irresistible movement, of which the cause 
was to be found in the policy pursued by the government in its 
dealings with them. 

As a consequence of the suspension of specie payments, Mr. 
Chase found himself confronted by the demand for an issue of gov- 
ernment notes, as a ready source of supply for the Treasury, before 
it was possible for him to draft a bill for a bank system. Interest 
at once centred upon this apparently unexpected demand, and the 
discussion had its issue in the first legal-tender act, approved Feb- 
ruary 25, 1862. By this act Congress, with a recommendation 
reluctantly given by the Secretary, adopted the expedient rejected 
by Mr. Chase in his report of December 9, and established a govern- 
ment currency, giving it, moreover, the quality of legal tender, 
which was probably not contemplated by him as possible, or as 
admissible even if possible. The plan of a bank currency, favored 
by Mr. Chase, then took the second place, and was finally thrown 
over to the next session of Congress. 1 

It was pointed out at the time, and there seems to have been 
great force in the suggestion, that all the advantages of a secured 
currency could be gained by a method much more expeditious than 
the elaboration of a complete system of national banks. A com- 
paratively simple measure, by which existing banks should be 
required to secure their notes by the pledge of United States bonds, 
to be placed in the custody of the Treasury, would have made their 
issues uniform and safe, and would have made them large perma- 
nent investors in government bonds. The banks of the three cities, 
New York, Boston, and Philadelphia, taken by themselves, had at 
the date of the suspension of payments an aggregate capital of 
$1,200,000,000, and against their liabilities for deposits and circula- 
tion amounting to $181,600,000 held a specie reserve of $44,000,- 
000, or twenty-four per cent. The issues of these banks, it was 
pointed out, if secured by bonds, could be used by the government 

1 A bill framed by E. G. Spaulding and Samuel Hooper was introduced on July 1 1, 
read twice, and referred to the Committee on Ways and Means, but a resolution to print 
6000 copies was laid on the table July 15, and the bill was dropped. — Cong. Globe, 
3258, 3293, 3362, 3370. 



ESTABLISHMENT OF THE NATIONAL BANKING SYSTEM 333 

as safely as its own notes ; the banks could be used as general 
depositories by the Treasury without risk ; the inconveniences of 
the Independent Treasury, which adjusted itself with difficulty to 
the new conditions created by war, could be avoided ; and the sys- 
tem which thus embraced the banks of the great cities could include 
without difficulty any bank anywhere that was strong enough to 
comply with the terms of such an arrangement. But whatever the 
financial merits of such an improvised national circulation may have 
been, it was not politically feasible. The existing banking interests 
were not then agreed as to the larger questions involved in their 
relations with the government ; the public were not prepared for a 
revolution in the policy of the government with respect to banks; 
and finally the Secretary himself, having in mind the comprehensive 
scheme of a permanent national banking system, was little inclined 
to adopt a measure which, falling short of his aim, might be found 
ultimately to stand in his way. The proposition had little strength 
then and attracted but little attention. 

When Mr. Chase again brought forward his plan, 1 at the begin- 
ning of the session of 1862- 1863, it was under greatly altered con- 
ditions. Two legal-tender acts had been passed, giving authority 
for the issue of $250,000,000 of United States notes, and of this 
amount all but $27,000,000 had been paid out. The price of gold 
had been rising through the year and now stood above 130, and 
the prices of merchandise were advancing. It was estimated by 
the Secretary that the banks of the loyal states in the course of 
twelve months had increased their circulation from $130,000,000 to 
$167,000,000, and their deposits from $205,000,000 to $354,000,000, 
making an increase of liabilities under both heads of about thirty 
per cent, and had increased their investments by not far from 
$70,000,000. With great ingenuity of reasoning he contended 
that nearly the whole increase in the volume of the currency was 
" legitimately demanded by the changed condition of the country," 
but that if there were any redundancy it was due to the issues of 
the banks and not to the new element added to the circulation 
by the government. 

In this state of things, with what appeared to most observers 
an alarming depreciation well under way, the need of funds for 
the immediate wants of the Treasury was again pressing. The 

1 Finance Report, 1862, p. 17. 



334 ESSAYS 

sale of the bonds authorized by the legal-tender acts had been 
trifling, and comparatively little was to be counted upon from that 
source. Indeed, Congress had blocked the way to any important 
sales, by providing that the bonds should be sold by the Treasury 
at the market price only, 1 and that legal-tender notes should be 
exchangeable for bonds at the pleasure of the holder, thus in effect 
limiting the price of bonds to par, and leaving purchasers little 
chance for a profit. The repeal of these provisions Mr. Chase 
asked for and secured at the end of the session, together with 
authority for borrowing in other forms to a vast amount. It was 
not by his advice, 2 however, that Congress at the same time made 
its third resort to an issue of legal-tender notes, authorizing an 
increase of the active legal-tender currency to $400,000,000, and 
the issue of an equal amount of legal-tender notes in other forms. 
He still maintained that an issue of government notes as a per- 
manent system was open to grave objection, and that if it were 
used for temporary relief, it must be with a sparing hand ; and he 
was more firmly persuaded than ever that the cure for the increas- 
ing disorder of the currency must be found in the resort to national 
bank-notes as the substitute for all other paper issues. He therefore 
pressed upon Congress at some length the considerations which 
weighed with him in favor of immediate legislation for this 
purpose. 

A comparison of the reasons urged by Mr. Chase in 1862 
with those briefly indicated by him in 1861 shows little change in 
his general estimate of the advantages promised by a permanent 
system of national banking. He adds in 1862 the consideration 
that under such a system the banks could be used safely as 
depositories in connection with the Independent Treasury, with 
advantages which perhaps experience had finally led him to rate 

1 Chase construed the provision of the statute authorizing the sale of bonds " at 
the market value thereof" to prevent sales below the current New York quotations, 
though in Congress the view was expressed that market rate signified whatever price the 
government could secure. Chase was clearly right, for otherwise the provision in question 
would have had no reason for its insertion. 

2 As in the case of the earlier legal-tender acts, Chase readily acquiesced in the 
views of the majority in Congress. In January, 1863, he prepared a bill, in response to a 
request from the Senate Committee on Finance, as a substitute for a pending measure 
authorizing a further issue of greenbacks, and his substitute accepted that proposal, 
merely adding provisions to facilitate the sale of bonds. — Cong. Globe, p. 270. 



ESTABLISHMENT OF THE NATIONAL BANKING SYSTEM 335 

more highly than at first. He also declares his opinion that in 
no way can the ultimate resumption of specie payment be made so 
certain as by the conversion of the entire paper circulation into 
an issue of bank-notes, secured by bonds bearing coin interest. 
On the whole the suggested advantages of the system, although 
substantial, are remote. Even the direct gain expected from the 
absorption of bonds by the banks is described as a sale amounting 
to $250,000,000 or more "within a very few years," promising, 
however, very little aid during the current year, and perhaps not 
much for the next. In this part of his recommendation, Mr. Chase, 
in December, 1862, was looking far beyond the wants of the mo- 
ment, to the time when the legal-tender notes, after serving their 
temporary purpose, should have disappeared, and the bank-notes 
should have become the sole and permanent currency ; and so far 
did he carry his forecast of the future in this respect that he even 
took note of the probable payment of the national debt, and the 
necessity in this case of finding some new basis for the bank circu- 
lation. " But these considerations," he said, " may be for another 
generation." 

The national currency bill, which by the strong influence of 
Mr. Chase and his supporters was passed by Congress and be- 
came a law February 25, 1863, 1 was framed on the familiar lines 
of the New York system, with details perfected by comparison 
with the banking systems of other states. It prescribed no limit 
for the number of national banking associations, but fixed the 
aggregate of notes to be issued by them at $300,000,000. Of this 
aggregate one-half was to be apportioned among the states, terri- 
tories, and the federal district in proportion to population, and 
one-half to have due regard to " existing banking capital, resources, 
and business." The notes were to be issued under the superin- 
tendence of a Comptroller of the Currency, to be secured by 
interest-bearing bonds of the United States, and to be redeemable 
in "lawful money," this term including legal-tender notes as well 
as specie. The banks were not required, however, to redeem 
their notes anywhere except at their own counters. Provision was 
made for the organization of banking associations by any appli- 
cants who should comply with certain conditions named in the 
act, and also for the conversion of state banks into national bank- 

1 12 " Statutes at Large," p. 665. 



336 ESSAYS 

ing associations upon application in due form. By a provision 
inserted upon motion of a Senator from New York and but little 
discussed, 1 it was also provided that any state bank, holding 
United States bonds to the extent of one-half its capital, might, 
upon transferring the bonds to the Treasurer of the United States, 
be authorized to issue notes to the amount of eighty per cent of 
the bonds transferred, the notes thus issued being supplied by the 
Comptroller of the Currency and payable at the Treasury in case 
of the failure of the issuing bank, in the same manner as other 
notes issued under the act. 

This bill did not pass without difficulty. In the Senate the 
vote upon its passage was 23 yeas to 21 nays and in the House 
78 yeas to 64 nays. These votes did not closely represent either 
political or sectional divisions, members of the same party from 
the same state being in some cases upon opposite sides. The 
bill had to encounter objections resting upon several different 
grounds. Not only was it opposed by some for political reasons 
and merely as a measure of the administration, but it was also 
viewed with great distrust by others, as a proposition for a vast 
financial consolidation, incomparably more formidable than the 
former Bank of the United States. The friends of the state banks 
eyed it with special jealousy, believing that the two systems, 
national and local, could not long stand side by side ; and in this 
they were justified by the avowed purpose of Mr. Chase, and by 
the strong language of some of his adherents. And among those 
who might not have been averse to a national banking system 
under some conditions, there was doubt and apprehension as to the 
opportuneness and the details of this particular measure. While 
the bill was under discussion, Congress was maturing the third 
legal-tender act, and the premium on gold, which had passed thirty 
in December, was rising from fifty to sixty, passing the latter point 
before the vote on the bank bill was taken in the House. The 
Secretary had seen in the bill a means for prescribing more surely 
for ultimate specie payment ; but, it was asked, what safe reliance 
could there be upon a system under which solvency meant sim- 
ply payment in depreciating paper and the security against 
insolvency was found in bonds which were sinking with the 
paper ? In ordinary times the bill probably could not have made 

1 Cong. Globe, February, 1863, p. 850. 



ESTABLISHMENT OF THE NATIONAL BANKING SYSTEM 337 

its way against these various elements of opposition ; but no incon- 
siderable part of its strength was due to the gloomy circumstances 
of the winter of 1 862-1 863. In Congress as well as among the 
people at large the resolution to stand by the government carried 
many to the point of relinquishing private objections to a measure 
declared necessary by the administration ; and so the bank bill 
gained a majority, not resting altogether upon conviction. 

Capital showed but little alacrity in organizing under the bank 
act of 1863. Seven months after its passage only 66 banks, with 
a capital of little over $7,000,000, had begun operations, and ten 
months from its passage only 139, with a capital of $14,740,000, 
reported to the Comptroller. The six states, Ohio, Indiana, Illinois, 
Michigan, Iowa, and Wisconsin, supplied 35 out of the 66 banks 
reporting in October, 1863, and 79 out of the 139 reporting in 
January, 1864. At the latter date New England had organized but 
14 national banks, New York 16, and Pennsylvania 20. The 
Comptroller of the Currency regretted the opening of so many new 
banks in states where there was no deficiency of banks already. In 
general, in the first year under the new act, a few strong banks had 
been established, as the First and Second National Banks of New 
York, the First of Philadelphia, the First of Pittsburg, the First of 
Cincinnati, and the First of Chicago ; but the existing banks for the 
most part held aloof, and new capital came in but sparingly. The 
report of the banks in the beginning of April, 1864, showed an 
investment by them in United States bonds of but $41,175,100. 
At this time, however, the importance of the new system as a 
market for government securities had pretty well disappeared. 
The desire of the administration, expressed on every occasion, 
was that the great mass of state banks, and especially the strong 
institutions in the older states, should be reorganized as national 
banks. These banks had already become large holders of govern- 
ment obligations, for reasons quite unconnected with any possible 
future reorganization under the national system. The depression 
of business which continued through the years 1862 and 1863 had 
diminished the demand for regular commercial loans, and many 
banks with large resources at command found it difficult to 
procure the usual amount of business proper. Tempted by the high 
rate of income which securities bearing gold interest began to 
pay, and anxious to employ their funds, banks were investing 

z 



338 ESSAYS 

freely in bonds of the United States and also in one-year certificates 
of indebtedness issued by the Treasury. In November, 1863, the 
banks of Massachusetts, though but three among them were 
national banks, owned government securities to the amount of over 
$53,000,000; and the banks of New York, city and country, 
probably held similar investments to an amount not far below their 
capital of $ 1 09,000,000. These holdings were unequally distributed, 
no doubt, but they far exceeded in the aggregate the amount of 
securities which the banks would have been required to deposit 
under the national bank act, so that the absorption of the exist- 
ing banks by the national system then promised to create little 
additional demand for bonds. 

The interest in the new system had in fact been concentrated 
entirely upon its practical merits and upon the expediency of substitut- 
ing it for the state system. From the passage of the act of 1863 
the Treasury had pursued the policy of actively stimulating the 
adoption of the national system. By a fortunate choice Mr. Hugh 
McCulloch, president of the Bank of the State of Indiana, had been 
appointed Comptroller of the Currency, — a gentleman widely 
known as an experienced and prudent manager and a strong 
advocate of a sound currency, originally opposed to the passage of 
the act, but finally convinced of its expediency and the wisdom 
of its leading provisions. It was characteristic of the policy of 
the Treasury as administered by McCulloch, that while the conver- 
sion of state banks into national was urged by every argument and 
persuasion, those sections of the bank acts which allowed the 
deposit of bonds and issue of notes without the abandonment of 
state charters remained dormant. The Comptroller, in a public 
circular, discouraged the use of these provisions, and although he 
admitted that if applications were made he "must obey the law," 
it is probable that his discouragement was in every case as emphatic 
as he found necessary for complete effect. It was his opinion 
that the state systems and the national could not long coexist ; " one 
or the other will fully occupy the field," and he had no doubts 
which would and should be the survivor. The issue was made up, 
then, in 1863, and the real object of public debate was hencefor- 
ward the national system, its merits, and its general adoption. 

The year 1863 was therefore a year of discussion, fruitful in 
pamphlets, criticisms, and propositions for amending the act. In 



ESTABLISHMENT OF THE NATIONAL BANKING SYSTEM 339 

some cases writers, representing large existing interests, showed 
a deep distrust for the whole scheme, and were ready to see state 
bank issues withdrawn and the field of circulation temporarily 
occupied by Treasury notes, rather than embark the whole banking 
capital of the country in an experiment. On all sides defects in 
the act were pointed out which justified the reluctance of solid 
banks to take out new charters under it. It was urged that the 
redemption of bank-notes at convenient centres was absolutely 
necessary in order to hold individual banks to any responsibility 
whatever and as a safeguard against general overissue. Provision 
for requiring the accumulation of surplus, omitted in the act of 
1863, was called for to insure the strengthening of weak banks. 
It was pointed out that the act did not make the government 
responsible for the safety of the bonds deposited with it, and that 
the banks were therefore called upon to entrust a vast amount of 
securities to the fidelity of agents over whom they had no control. 
The act had authorized the Secretary of the Treasury to employ 
national banks as depositories of the public moneys at his discre- 
tion, but without any requirement as to security; and it was 
urged that although with proper provisions of this kind the banks 
could be used as depositories freely and the proved inconveniences 
and evils of the Independent Treasury greatly mitigated, any 
system of deposit banks without such provision must be liable to 
abuse and would probably be found dangerous. The act had 
also made no provision for the voluntary winding up of banks, so 
that the extrication of capital from an unprofitable business 
appeared to be impossible. In much that was written in that year 
it was either assumed or advised that the provisions for the issue 
of secured national notes by state banks, contained in the act of 
1863, should be retained and brought into use; and the policy of 
discouragement pursued by the Comptroller of the Currency, 
already referred to, did not escape sharp criticism. There was 
also very general condemnation of the practice adopted by the 
Comptroller, apparently without warrant of law, of requiring all 
banks reorganizing under the national act to give up their dis- 
tinctive names and become simply the First, Twentieth, or Fortieth 
National Bank of some town or city, as might happen. The 
names of established banks represent a good will and an earned 
reputation and credit. They are also a security for the public, 



340 ESSAYS 

who know banks by name for good or ill, but cannot have 
an equal familiarity with a list of mere numbers. The Comp- 
troller had urged as a reason for requiring the use of numbers 
instead of names by reorganized banks that all who came under 
the system had an interest in " making it symmetrical and harmo- 
nious, as well as national," but it was difficult to believe that this 
was all ; and, with the strong objection to partial loss of identity felt 
by the banks, there was also a certain vague impression that 
something more than met the eye was implied in the proposition 
to make them all indistinguishable members of a vast system hav- 
ing its centre of control at Washington. 

At the session of 1 863-1 864 Congress proceeded to revise the 
whole system in the light of the year's experience. A bill for that 
purpose was reported March 13, 1864, and from that time the 
subject was before Congress, in one form or another, until the 
final votes of the two Houses on May 31 perfected the measure, 
under which the national banking system was at last fully estab- 
lished. 1 Many of the suggestions brought forward in popular dis- 
cussion had been adopted by the Comptroller and recommended in 
his annual report at the beginning of the session, and others were 
adopted by Congress upon advice received from other sources. 
The law was completely recast. The provision for apportioning 
the $300,000,000 of circulation among the states was repealed; it 
was provided that only registered bonds should be deposited as 
security, and that the property of the banks should thus be made 
safe while in the hands of the government ; redemption of notes 
by every bank in some reserve city, as well as at its own counter, 
was provided for ; the accumulation of a surplus equal to at least 
one-fifth of the capital of any bank was required ; provision was 
made for requiring full security from banks used as depositories by 
the Treasury ; the provisions as to the amount of capital and the 
terms on which a bank could begin its business were somewhat 
strengthened ; and in short the whole system was made firmer and 
more harmonious. Without entering into the details of the legisla- 
tion, it is enough to say that in the act of June 3, 1864, the na- 
tional banking system took the form which in essentials it still 
retains. 

In its provisions with respect to the state banks the act of 

1 13 " Statutes at Large," p. 95. 



ESTABLISHMENT OF THE NATIONAL BANKING SYSTEM 341 

1864 made two significant changes. It provided expressly that 
state banks reorganizing under the national system might come in 
under their former names and without change in the amount of 
their shares. Special provision was even made for the exemption 
of stockholders from personal liability, under conditions intended to 
meet the case of the Bank of Commerce of New York and in fact 
applicable to no other. 1 The sections, however, which allowed the 
issue of secured national currency to state banks were omitted in 
the revised act, and thus Congress planted itself finally on the 
ground of an exclusively national system, and invited the adhesion 
of all existing banks, but rejected any connection short of complete 
responsibility to national authority. No special taxation was pre- 
scribed for the purpose of compelling the adhesion of distrustful. 
or reluctant banks, but the language used by the advocates of the 
new law left little room for doubt that such measures would follow.. 
For the present it was enough that the current of public opinion 
was setting in favor of the national system, and that many who had 
once opposed it now accepted the settled policy of the government 
and withdrew their opposition. 

The hesitation of the state banks as to reorganizing under the 
national system began to give way in the summer of 1864. The 
discussion of the system in Congress and the adoption of the amended 
act removed many special objections to the law, and made it cer- 
tain that final acquiescence would be the only condition on which 
the right of issue could be enjoyed. The financial strain of the 
war and the depreciation of the currency, shown by the price of 
gold, which fluctuated violently between 200 and 285, had put an 
end to all probability of an early recovery, and made a long de- 
pendence on legal-tender paper of uncertain value altogether 
likely. To adjust themselves to the present state of things began 
then to be thought wise by many who had hitherto maintained a 
merely expectant attitude. The announcements of intention to 
reorganize began to be frequent in June and July. At the close 
of November the Comptroller reported that 584 national banks 
were in existence, of which probably about one-third were reorgan- 
ized state banks ; and he was able to say that of the last 100 
banks organized, 67 were state banks, that nearly all the bank- 

1 This exemption applied to existing state banks having a capital of not less than 
$5,000,000 and a surplus of twenty per cent. 



342 ESSAYS 

ing capital of Philadelphia had then been reorganized, and that 
of the numerous applications then coming in most were for the 
conversion of old banks. It was noticeable, however, that at 
that time only one of the banks in New York City had reorganized, 
although several new banks had been established under the 
national system. Indeed, the Comptroller was plainly embar- 
rassed by the hostile influence of the banks in New York ; for 
after noticing the fear of some that the national banks might 
reproduce the evils of the weaker state banks, he remarked in 
thinly veiled language that these apprehensions, entertained " or 
professed to be entertained by the bankers of a state, in which a 
system similar in some of its main features was in practical opera- 
tion, intimidated for a time the capitalists of other states, and 
retarded the reorganization of state banks." A group of New York 
banks, however, took steps looking in the direction of reorganiza- 
tion in December; 1 by the end of that month 21 of the Boston 
banks had reorganized, and the stream of applications soon be- 
came so strong that nearly 500 banks were chartered in the five 
months from December 1, 1864, a large proportion of them being 
state banks reorganized. The change from the old system to 
the new went on throughout the year 1865, and at the close 
of December was nearly complete, 1582 banks then reporting 
to the Comptroller, of which more than 900 were formerly state 
banks. 

Several influences had expedited this change. In the states 
having a large amount of bank capital, enabling acts had been 
passed in many cases, authorizing incorporated banks to exchange 
their state charters for those of the United States without disso- 
lution or winding up, thus preventing the expense, interruption to 
business, and loss incident to the collection and distribution of 
assets which would otherwise have been necessary upon the cessa- 
tion of corporate existence under state laws, and making the reor- 
ganization a merely formal proceeding which left the identity of 
a bank unchanged. Acts of this sort were adopted in 1863 and 

1 The Fourth National, the first bank with large capital to be organized in New 
York under the national system, was due to the influence of Jay Cooke ; and the fear of 
the formation by him of a bank with a capital of $ 50,000,000 is said by Mr. Cooke to 
have been a factor in the change of policy of the other banks. See " A Decade of 
American Finance," North American Review, November, 1902. — Editor's Note. 



ESTABLISHMENT OF THE NATIONAL BANKING SYSTEM 343 

1864 by Massachusetts, Connecticut, and Pennsylvania, and early 
in 1865 by Maine, Rhode Island, New York, New Jersey, Mary- 
land, and Indiana. In some states, also, as in Massachusetts, the 
neglect or disinclination of the legislature to repeal the special tax 
laid by the state upon its banks had a serious effect in turning 
the scale in favor of change. 

Far more important, however, was the influence exerted by the 
belief that Congress would take steps to drive from the field all 
notes issued by state banks, and the passage of a measure for this 
purpose, to take full effect in 1866. The Comptroller of the 
Currency, in the first year of the new system, had refrained from 
advising any such action, but in his report of 1864 he clearly 
expressed the opinion that the time had come for Congress to 
compel the withdrawal of all state issues. 

When the bill amending the internal revenue act came 
before the House at the session of 1 864-1 865 this subject 
was discussed in a somewhat desultory manner, and opinion 
was found to be evenly divided, but the House finally, on February 
18, by a vote of 68 to 6j y inserted in the bill a section im- 
posing a tax of ten per cent on all state bank notes paid out 
by any national or state bank after January 1, 1866. 1 The bill 
then went to the Senate, and on March 1 a motion to strike 
out this section was refused by a vote of 20 to 22. On the next 
day the section was amended by substituting July 1 for January 1 
as the date when the tax should take effect, and a motion to 
strike out was then refused, 17 to 21. This amendment was 
assented to by the House upon the report of a committee of con- 
ference, and the section accordingly became a part of the internal 
revenue amendment act, approved March 3, 1865. It was looked 
upon by all parties as the natural sequel of the national bank acts, 
delayed by doubt or policy for a time, but in fact a vital part of 
the scheme. It suppressed the state bank notes by destroying the 
profit of issue, but it avoided the severity of some propositions for 
the same object, which would have taxed outstanding circulation, 
or would have taken effect earlier ; and this degree of moderation 
was apparently necessary for the success of the measure in either 
House. Adopted at a moment when the establishment of the 
national system was well advanced, the section stood as a threat 

1 13 " Statutes at Large," p. 484. 



344 ESSAYS 

for the next sixteen months ; and when at last it took effect, the 
state bank issues were rapidly disappearing. 

There is no doubt also that the high premium on gold from 
the spring of 1864 to the spring of 1865 had an important influ- 
ence in bringing many banks to an immediate decision of the ques- 
tion of reorganization. When the suspension of specie payments 
took place, the banks in twenty-two loyal states, excluding those 
on the Pacific coast, held not far from $76,000,000 in specie, of 
which the banks of Boston, New York, and Philadelphia held 
$33,000,000. During the year 1862 the holdings for all the states 
referred to were above $81,000,000, and the banks in the three 
cities at the end of the year had a specie reserve of $48,000,000. 
The high rates for gold which prevailed throughout 1863 tempted 
many banks to sell their coin, and probably caused a considerable 
redistribution of that which remained; but in January, 1864, the 
banks in the three cities still held $3 7,000,000. Gold was then quoted 
at one hundred and fifty-one, but it soon began to advance rapidly. 
On the 2 1st of June it passed two hundred, and with violent fluctu- 
ations remained above this point for most of the time until March, 
1865. There was plainly a strong inducement for banks holding 
large stocks of gold but carrying on their business upon the paper 
basis, obliged to receive legal-tender notes in all payments, and 
not bound to make payment in any other medium, to sell their 
specie for legal tender at these high rates. So long as any need of 
preparation for eventual specie payments had been felt to exist, or 
so long as further advance in the premium on gold was looked for, 
the specie might well be held; but as affairs stood in the summer 
of 1864 it is not surprising that the disposition to collect the profit 
to be made by the sale of gold began to strengthen. 

Not a few of the more conservative managers of the banks 
saw with regret this tendency to place the whole business of 
banking upon the paper basis and were reluctant to admit that 
all the responsibility for facilitating an ultimate return to the 
specie standard could be thrown upon the government. From 
several quarters the proposition was made that the national banks 
should be required to accumulate as a specie reserve some part 
of the coin interest received by them on the bonds deposited to 
secure their notes. The New York Clearing-house banks pro- 
posed a small accumulation of this kind, which was rejected by 



ESTABLISHMENT OF THE NATIONAL BANKING SYSTEM 345 

the House without a count. In the Senate, Mr. Collamer of 
Vermont proposed that one-half of the coin interest should be 
added by the banks to their reserves until the entire reserve 
required by law should consist of coin. Amended so as to require 
but one-fourth of the coin interest to be so retained, Mr. Col- 
lamer's proposition was rejected by a vote of 15 to 20; and thus 
the amended law of 1864 went into effect in a form which com- 
pletely ignored the question of providing for a return to specie. 
The banks sold their gold freely as a preparation for reorganizing 
under the national system, and the gold thus released swelled the 
strong current of exported metal, forced out of the country by the 
paper currency in the years 1864, 1865, and 1866. By July, 1865, 
the specie held by the banks in the three cities, Boston, New 
York, and Philadelphia, had sunk to $20,000,000, and by January, 
1866, the aggregate of specie held by the 1582 national banks of the 
United States was under $20,000,000, and so far as shown by the 
quarterly reports it remained below this point until 1868. In some 
cases the profit reaped by the banks from the sale of their specie, 
with other undivided profits already in hand, was paid out as an 
extra dividend to stockholders upon the surrender of the state 
charters ; in others it was used as the foundation for the surplus 
which national banks were required to accumulate to the extent 
of one-fifth of their capital, or was added to surplus funds already 
held ; and in others still the opportunity was taken to increase 
capital by making stock dividends. 



THE CIRCULATION OF THE NATIONAL BANKS, 

1 865-1 900 1 

The effects of the rapid conversion of state banks into national 
were visible for many years, in the unequal distribution of capital 
under the national system between the several states and sections. 
The amended bank act of 1864 repealed the provision for ap- 
portioning the $300,000,000 of bank circulation among the states, 
and early in 1865 it began to be seen that, by the conversion en 
masse of the banks in states well provided with banking capital, 
the limit of aggregate circulation was likely to be reached so 
soon, as to leave little opportunity for the enjoyment of the 
right of issue in states where the number of banks already 
organized was small. By a mistake of administration, an effort 
made by Congress to provide for this possibility only hastened 
the absorption of the right of circulation by the states which 
could most easily make use of it at short notice. A clause 
in the act of March 3, 1865, for amending the bank act, re- 
vived the provision by which circulation should be allotted to 
banks in the several states, one-half according to population 
and one-half according to existing banking capital, resources, and 
business. 2 In the internal revenue amendment act of the same 
date, however, a section was inserted providing that any state 
bank having a capital of $75,000 or more, applying before the 
first day of July, 1865, for authority to become a national bank 
and found to be in good credit, should receive such authority in 
preference to new banks applying for the same. 3 It was clearly 
possible to interpret the two provisions so as to give effect to 
both, by simply giving the banks already existing in any state 
the preference in allotting the circulation apportioned to that 
state ; and the two acts being of even date and neither provision 
purporting to limit or control the other, it was plainly the duty 
of the treasury authorities to execute both. 

1 See note, p. 314 above. 2 13 " Statutes at Large," p. 498. 3 Ibid., p. 469. 

346 



THE CIRCULATION OF THE NATIONAL BANKS 347 

Mr. Clarke, the Comptroller of the Currency, however, with the 
approval of Mr. McCulloch, who had then become Secretary of 
the Treasury, adopted a course which rendered the provision for 
apportionment entirely nugatory. Starting from the correct 
assumption, that it was the purpose of Congress as well as of the 
administration to effect the general conversion of the state banks, 
the comptroller proceeded to give to existing banks coming under 
the national system authority for the issue of currency, as fast as 
they applied, without regard to the provision of law limiting the 
amount to be allowed to any one state. The states, which already 
had much banking capital and were ready to move at once, had 
therefore the good fortune to see their banks easily provided with 
the right of issue, while the states which came later, or which had 
to organize new banks, soon found the aggregate so far filled up as 
to leave little or no room for them. The fact that the preference 
allowed to existing banks was confined to such banks as should 
apply before July 1 hastened the applications, and therefore some 
time before that date was reached the elaborate apportionment of 
circulation contemplated by Congress had been buried beyond the 
possibility of resurrection. 1 As early as June 10, 1865, more than 
$250,000,000 out of the aggregate of $300,000,000 had been author- 
ized. Massachusetts, Rhode Island, and Connecticut, where the 
existing banks had gone over to the national system almost in a 
body, were entitled under the legal apportionment to less than 
$34,000,000, but had received authority for $85,000,000. New 
York, New Jersey, Pennsylvania, and Ohio had more than filled 
their legal quotas ; the West and Northwest, Indiana and Minnesota 
excepted, generally were still short of theirs ; and the states in 
the South and the states and territories west of the Missouri en- 
titled to nearly $100,000,000 had received authority for only about 
$5,000,000, of which nearly three-fourths was in Kentucky and 
Missouri. 2 From the 22d of May, banks in New York, Philadel- 
phia, Providence, Boston, and Hartford, applying for conversion, 
were called upon to waive their rights to ask for currency in excess 
of one-third of their capitals ; but it was then too late to do much 

1 In a debate in the Senate, a few years later, Mr. Sherman declared " that this 
whole difficulty grew out of a disregard of the law ; that it was not the defect of the 
law, but a violation of the law." — Cong. Globe, January 24, 1870, p. 699. 

2 Bankers' Magazine, July, 1865, p. 54. 



348 ESSAYS 

more than take precautions against overrunning the aggregate of 
$300,000,000. Apparently not all of the circulation, applied for 
and at first allotted in these hasty proceedings, was actually issued ; 
but a startling result showed itself in October, 1866, when $292,- 
673,000 of notes had finally been given out for circulation. The 
allotment between certain groups of states then stood as follows : * — 





Quota if 


Amount 




apportioned 


issued 


Of states having an excess : 


In millions 


In millions 


Six New England 


$457 


$103.5 


Five Middle .... 


94.9 


124.2 


Ohio, Indiana, Minnesota . 


28.3 


307 


Of states deficient: 






Six Western .... 


377 


18.9 


Kentucky, Tennessee, Arkansas . 


22. 


3-6 


Nine Southern, Atlantic, and Gulf 


66.2 


6.9 



It is probable that in this remarkable disregard of the rule of 
apportionment laid down by Congress, both the Secretary of the 
Treasury and the Comptroller of the Currency were taken by sur- 
prise by the extent and rapidity of the movement for the conversion 
of state banks, and that they also had a mistaken belief that, after 
all, the resulting disproportion would not be of long duration. The 
fact already noticed, that a large number of the Eastern banks 
applying to be admitted as national banks late in May, 1865, were 
induced to agree to a reduction in the amount of circulation which 
they could claim, indicated that the demand for the right of circu- 
lation by the Eastern and Middle states had gone beyond the 
amount which could be readily used. For several reasons, more- 
over, the authorities at the Treasury may have underrated the real 
importance of the inequality which they were sanctioning. It was 
the opinion of the Comptroller that the establishment of an effec- 
tive system of central redemption for national bank-notes would 
materially curtail the issue, and would destroy the interest of 
many banks in keeping up a large circulation. 2 An active move- 

1 The quota for every state, if $300,000,000 of circulation had been apportioned 
according to the act of Congress, is shown in 7 House Exec. Doc. No. 33 of 1 865-1 866. 
The amount issued to banks up to October I, 1866, in the aggregate, $292,673,000, is 
given for every state in the Comptroller 1 s Report for that year, p. 66. 

2 See Comptroller's Report for 1865, p. 6 ; and also a letter by the Comptroller, 
dated July 15, 1865, in the Bankers' Magazine for September, 1865, p. 205. Mr. Hurl- 



THE CIRCULATION OF THE NATIONAL BANKS 349 

ment was then in progress for establishing such a system, and for 
maintaining assorting houses in New York, Boston, and Phila- 
delphia, from which all notes of banks not providing for the par 
redemption of their notes in one of these three cities should be 
promptly sent home for payment. 1 The general principle of this 
scheme appears to have been sanctioned by the Secretary, and the 
expectation of some such action was assigned by the Comptroller 
as a ground on which some banks, unable to secure any part by 
the right of issue, might hope to obtain a share at a future time. 
The effect of a system of real redemption in sending home the 
notes of any bank after a brief currency, may therefore very well 
have been counted upon as a probable discouragement of weak 
banks, and as likely to make the original allotment of the right of 
issue, in part at least, merely provisional. 

It must also be borne in mind that in the spring and summer of 
1865, the expectation of an early movement toward specie pay- 
ment was general. The Secretary of the Treasury was strongly 
in favor of such a movement, and in his report in December even 
fixed upon January 1, 1868, as the date at which he believed redemp- 
tion practicable. 2 Although in the winter of 1 865-1 866 he had 
the mortification of seeing developed in Congress a serious opposi- 
tion to his efforts in this direction, and was forced to submit to a 
jealous limitation of the powers which he thought necessary for 
his purpose, still, for many months after the close of the war in 
April, 1865, he was strong with the public and confident in his 
policy, and he even appeared to have the support of Congress 
when it met in December. With the expectation then that specie 
payments were not far distant, he may easily have believed that 
the bank circulation would soon right itself by the disappearance 
of all provisions for any limit of the total amount of bank-notes. 
The national bank act was so drawn as to adapt itself in all other 
respects to the state of things in which coin should become the 
only legal tender, and Mr. McCulloch therefore not improbably 
believed that free banking would soon supersede the embarrassing 

burd, who was Deputy Comptroller in 1865, and afterwards Comptroller, urged the im- 
portance of the central redemption and its restrictive influence in all his reports from 
1866 to 1870. 

1 For the action of the banks of the three cities on this subject, and for a letter by 
Mr. McCulloch, see Bankers' Magazine, 1865-1866, pp. 193, 401, 415. 

2 See Finance Report, 1865, p. 36. 



350 ESSAYS 

provisions of the existing act. Entertaining such a belief, he was 
not by nature the man to be strict as to the precise terms of the 
authority upon which his powers rested. It may also have been 
thought that the agricultural states of the South and West would 
not be able to use their quota of circulation without a good deal of 
delay, and the relief of resumption would be early enough to meet 
their needs. Considerations of this nature were no doubt strength- 
ened by the fact that to limit the circulation of banks in the East- 
ern and Middle states to the proportion required by Congress would 
have caused a heavy reduction of the bank circulation enjoyed by 
those states for many years under the system of state banks. 

The attainment of the limit of aggregate circulation instantly 
checked the growth of the national banking system, as regards the 
number and capital of the banks organized. 1644 national banks 
reported to the Comptroller October 1, 1866; the number rose 
slightly the next quarter, and then fell off, became stationary, and 
at last declined, until in October, 1870, it was 161 5, sixty banks hav- 
ing in the meantime gone into voluntary liquidation. The capital 
of the banks rose from $41 5,050,000 to the neighborhood of 
$420,000,000, where it stood until near the middle of 1 869. These 
figures sufficiently show the restraint upon the organization of new 
banks, at a time when dividends averaging ten per cent and a con- 
siderable increase of surplus showed that the banks organized 
under the system were in the main prosperous. But this restraint 
was felt in different parts of the country in very unequal degrees. 
In the Eastern and Middle states, although the wealth and activity 
of the community gave them a wide field for the employment of 
banking capital, the large share of circulation which they had ob- 
tained under the national act gave them a provision adequate to 
their needs for several years. The greater density of their popu- 
lation, moreover, would have made it easier for them in any case 
to supply deficiencies by banks of deposit and discount under 
state laws or by trust companies, the convenience of which for 
some banking purposes was then beginning to be understood. 
But in the West and Northwest the condition of things was far 
different. Those sections felt the keen stimulus to enterprise 
which the restoration of peace had brought with it. Their popu- 
lations were once more rapidly increasing by immigration ; their 
railway systems were opening up new territories with feverish 



THE CIRCULATION OF THE NATIONAL BANKS 351 

haste ; and there was every presage of a period of wonderful 
growth. But the increase of banking which should normally 
attend and foster this development was practically impossible. 
For the multiplication of banks of issue there was no room under 
the national system, and mere banks of deposit and discount 
under that system neither answered the needs of the community, 
nor presented attractions to capital. In the group of Western 
states already noticed as deficient in bank circulation in October, 
1866, there was, therefore, a gain of only three national banks in 
the next four years. The gain in circulation in the same states 
was for the same period only $5,000,000, in spite of the most 
ingenious and sometimes costly efforts to secure the rights sur- 
rendered by banks going into liquidation or contracting their 
business. 1 

With the central Southern states and those of the Southern 
Atlantic and Gulf group, the case was even worse. Many of those 
states had been devastated by the war and all of them had suffered 
heavy losses of property. Their social and industrial systems had 
been overturned and, with everything to be reconstructed, they 
were harassed by misfortune, political as well as economic. In 
any case, they must have been slow in rebuilding their banks and 
probably dependent in good degree upon the reluctant aid of out- 
side capital. It is doubtful whether, if entire freedom of organiza- 
tion had then existed, the South could in those years have done 
much toward the extension of its banking upon any sound basis. 
Before this could be accomplished time was needed, not only to 
repair the losses of the war, but to secure political peace and con- 
fidence in the future, and to enable the South, moreover, to regain 
possession of its own state governments. There is little question, 
however, that the process of financial reconstruction was made 
slower and more difficult by the impossibility of securing any rea- 
sonable share of the right of issue. In the four years from Octo- 

1 Mr. Sherman asserted in the Senate in June, 1868, that " there are banks in exist- 
ence in the Western states that have paid from ten to forty thousand dollars in New 
England and New York for the privilege of starting banks whenever banks there have 
failed." Mr. Pomeroy added that " the banks of the West have been compelled to buy 
the circulation of New England and New York and pay three and four per cent for it." 
Cong. Globe, 1867-1868, p. 3187. In 1872 the rate paid to brokers for notes of banks 
closing or insolvent, was said to be " from four to six per cent." — Finance Report, 1872, 
p. 74. 



352 ESSAYS 

ber, 1866, the nine Southern states on the coast lost five of their forty- 
eight banks, and gained less than $2,000,000 in circulation. The inte- 
rior group, Kentucky, Tennessee, and Arkansas, gained nine banks, 
chiefly of small capital in Tennessee, but with an increase of circula- 
tion of only $700,000. Whether the South could otherwise have 
availed itself of the national system to any great extent or not, it 
appeared to be practically cut off from making the trial, by the 
absorption of the right of issue in the North and East. 

It must not be forgotten, however, that even if the apportion- 
ment had been carried out in strict compliance with the terms 
of the law, the evils complained of would only have changed their 
place without being prevented. The theory on which Congress 
proceeded, of allotting the right of issue, in proportion partly 
to population and partly to an indefinite basis of estimated capital, 
could never have distributed the note issue in the proportion in 
which it would have distributed itself if left entirely free. Probably 
the existing banking capital and surplus would have made a much 
nearer approach to a natural allotment than the basis proposed by 
Congress, since it represented more nearly the essential needs and 
capacities for banking as they then existed in the several parts 
of the Union. The allotment of a limited amount of circulation 
upon the basis adopted by Congress would have given the South 
and West freedom for bank expansion, which they might or might 
not have used, but would have compelled a heavy reduction of 
banking facilities in the Eastern and Middle states, not only 
checking their natural growth, but causing a positive diminution 
of existing financial machinery. The conditions of the case pre- 
sented a dilemma, therefore, from which there was no escape so 
long as the limit upon the aggregate issue of bank-notes should 
remain. 

The course pursued by the Comptroller, as has been seen, threw 
the pressure of a limited right of issue upon the South and West. 
The sections thus harshly treated were not slow in making their 
complaints heard. Little notice was taken of the subject in the 
reports of the Secretary and Comptroller for 1865, but some effort 
was made in Congress at the session of 1 865-1 866 to find a remedy. 
The choice lay between an increase of the aggregate issue and the 
withdrawal of circulation from states having an excess under the 
rule established by Congress, and its distribution among those found 



THE CIRCULATION OF THE NATIONAL BANKS 353 

deficient. The latter expedient met strong opposition from the 
states which would have been drawn upon for the supply of the 
others ; and an increased total issue was also opposed as threaten- 
ing a multiplication of the obstacles to early specie resumption. 
Congress found it impossible, either at that session or at several 
succeeding sessions, to act upon a question thus beset with diffi- 
culties. At the session of 1867-1868 a bill passed the Senate, 1 
withdrawing and redistributing $20,000,000 of bank circulation ; 
but the House at the next session substituted for this plan a pro- 
vision for the allotment of $150,000,000 of circulation according 
to the appraised value of property in the several states, 2 and the end 
of the session found the two Houses in hopeless disagreement. 3 
At the spring session of 1869 the Senate passed a bill redistribut- 
ing $30,000,000,* but no action was taken upon it in the House. 

At the session of 1 869-1 870 the subject again came up and, 
after much debate and a series of disagreements between the two 
Houses, a bill was framed to reconcile the differing opinions of 
those who agreed as to the necessity for some action for the relief 
of the South and West. Under two acts passed in 1867 and 1868 
Congress had authorized an issue of temporary loan certificates, to 
be used in redeeming certain legal-tender compound-interest notes 
issued in the latter part of the war. These certificates, bearing 
interest at three per cent, by the terms of the act authorizing their 
issue could be held by banks as part of their reserve, and were still 
outstanding to the amount of $45,500,000. The withdrawal of this 
amount of paper serving one of the purposes of money was accord- 
ingly proposed as an offset for an increase of national bank-notes, 
and upon this basis Congress passed the act of July 12, 1870. 5 This 
act provided that $54,000,000 of bank-notes might be issued to 
banks in states having less than their due proportion under the 
act of 1865, and that the three per cent certificates should be 
called in and redeemed as fast as the bank-notes should be issued. 
This operation completed, a further amount of $25,000,000 was 
then to be withdrawn from states having an excess of bank cir- 
culation, and issued to banks in states having less than their due 
proportion ; and provision was also made by which, in addition, 

1 Cong. Globe, 1 867-1 868, p. 3222. * Ibid., 1869, p. 371. 

2 Ibid., 1 868- 1 869, p. 1333. 5 16 " Statutes at Large," p. 251. 

3 Ibid, p. 1897. 



354 ESSAYS 

banking associations might be moved from any state having an 
excess of bank circulation to any state found deficient. 1 The same 
measure provided for the establishment of gold banks, issuing 
notes redeemable in gold coin upon the security of United States 
bonds, and in other respects carrying on their business upon a gold 
basis. This addition to the national system was made in view of 
some supposed needs in the Atlantic ports and also of the anoma- 
lous condition of the Pacific states, where, by popular will, aided 
by local legislation, the gold standard had been retained during and 
after the war. 2 It was in fact an experiment in free banking on the 
specie basis. 3 The gold notes to be issued were not subject to any 
aggregate limit, and their introduction was not looked upon as hav- 
ing any relation to the questions raised by the mass of inconvert- 
ible paper. The establishment of such a system carried with it, 
however, some implication that the redemption of the remainder 
of the national currency in specie was now felt to be too remote 
to be counted upon. This impression was confirmed by the course 
of debates on the various plans for a redistribution of the national 
bank issues, and by the strength of the minority which favored the 
plan of giving relief to the South and West by some form of paper 
expansion. 

There was no delay in taking advantage of the act of 1870. 
When the Comptroller made his next report, dated November 7, 
1870, thirty-one banks had already been organized under the new 
law, and two hundred and fifty applications were on file. Many 
of the latter were believed to be speculative or unsupported by 
capital; but it was clear that a considerable movement had 
started. 4 Of the banks organized twenty were in the Western 
states, eight in Kentucky and Tennessee, and only three in Vir- 

1 The Senate had proposed an increase of $45,000,000, and the House $95,000,000. 
The Senate conferees agreed to $54,000,000 as the equivalent of $45,000,000, and of the 
reserves, estimated at 20 per cent, which the banks would have to keep ; and this calcu- 
lation was accepted on the part of the House. — Cong. Globe, July 6, 1870, p. 5285. 

2 See an article by Professor Moses, " Legal-tender Notes in California," in the 
Quarterly Journal of Economics, October, 1892. 

3 The bill as passed by the Senate provided that the notes should be redeemed in 
" gold or silver coin." " But," said Mr. Garfield, one of the conferees on the part of the 
House, " we strike out the words ' or silver,' so that there shall not be two metals named 
as the money in which the notes shall be redeemed. Silver is not, under our laws, a 
legal tender except for sums of five dollars or less. To this modification the Senate 
agreed." — Cong. Globe, June 28, 1870, p. 4949. 4 Comptroller 's Report, 1870, p. 25. 



THE CIRCULATION OF THE NATIONAL BANKS 355 

ginia and Georgia ; but of the applications nearly one-fourth, 
representing one-third of the capital called for, were from the 
Southern coast states. The movement thus begun went on, until 
at the close of 1873 Mr. John Jay Knox, who had then become 
Comptroller of the Currency, reported that all but a small fraction 
of the additional $54,000,000 had been issued or authorized, and 
that he should next proceed to the withdrawal of $25,000,000 of 
circulation from the banks of Massachusetts, the city of New 
York, the city of Providence, and Connecticut, and its allotment 
among banks in states having a deficiency. This allotment it was 
necessary to make, under the terms of the act of 1870, on the basis 
afforded by the census of that year, and the Comptroller had already 
given a table in his report for 1872, showing the circulation then 
actually authorized and the allotment of $354,000,000 which would 
be required under the law of 1865. 1 This table and the returns for 
1870 and 1873 enable us to make the following comparison : — 





Circulation 


Circulation 


Circulation 


Of states having an excess in 1866: 


October i, 1870 


November i, 1873 


if Apportioned 


Six New England . 


. 104.5 


no. 5 


39-8 


Five Middle .... 


. 125.4 


I24.6 


115. 2 


Ohio, Indiana, Minnesota 


• 3i- 


4I.9 


43-9 


Of states deficient in 1866: 








Six Western .... 


. 24.7 


42.5 


43-9 


Kentucky, Tennessee, Arkansas 


4.1 


II. 2 


21.5 


Nine Southern, Atlantic, and Gulf . 6.1 


16.6 


47.8 



These figures show plainly the strength of the demand for 
banking facilities in the deficient sections. They also show the 
singular crudity of the expedients by which Congress had under- 
taken the apportionment of bank circulation. Upon a mixed 
basis of population and resources the West, even with the relief 
afforded by a fresh allotment under the new census, was sure to 
find its proportion under the law too narrow for it ; and the South 
was as certain to find it impossible to use its quota, even when 

1 The acts of 1863 and 1865 called in identical words for the apportionment of half 
of the issue, " having due regard to the existing banking capital, resources, and business " 
of the states. In 1872 Mr. Knox, after consultation with the Secretary of the Treasury, 
contented himself with using the reported valuations of the states found in the census, in 
satisfaction of the above requirements. See Finance Report, 1872, p. 72. In 1865 
Secretary McCulloch made an allotment which is not to be reconciled with the valua- 
tion of i860. 



356 ESSAYS 

reduced in accordance with the diminished importance of those 
states. It is easier, however, to see the defects of the method 
adopted than to imagine a substitute which would have made any- 
satisfactory allotment of a limited right of issue. As regards the 
mere use of the bank-notes as currency, they flowed like the legal- 
tender notes with the current of mercantile payments, and the place 
of issue was as little important in the one case as in the other. 
Once in circulation, a bank-note passed from hand to hand without 
inquiry as to the particular bank from which it was issued. Its 
source was easily seen, but in the absence of any effective redemp- 
tion there was no motive for returning it thither, and so it passed 
as an undistinguished drop in the ocean of paper currency. As 
early as 1868 the Comptroller complained that even the notes of 
banks in liquidation were not presented and that the owners of 
such banks were able to reap all the benefit of their circulation 
after they had ceased to carry on any real business ; and it was to 
meet this evil that the act of July 14, 1870, was passed, requiring 
all banks in liquidation to deposit lawful money and withdraw their 
bonds from the Treasury within a fixed limit of time. 1 This legis- 
lation hastened the settlement between the issuing banks and the 
Treasury, but the notes, whether issued by active or by defunct 
banks, still gravitated as slowly as ever toward the place of redemp- 
tion. In short, the bank-note was nearly as destitute of any domi- 
cile as coin itself, and therefore it followed that, of the whole mass 
of currency afloat at any given moment, any particular state en- 
joyed only such proportion as it was entitled to by its financial 
relations with other states and sections, as it might in the case of 
coin or of legal-tender notes. The debtor states were deficient in 
anything that could serve as a medium of payment, and the creditor 
states found currency abundant. It is not to be supposed then that 
the South or any part of the West really had less currency for use 
by reason of their failure to obtain their proportion of the right of 
issue. 

Those states undoubtedly suffered from a lack of general bank 
accommodation. The requirement made by the law that every 
national bank, whether issuing notes or not, should qualify itself 
for issue by a deposit of bonds equal to at least a third of its 
capital, was by itself a serious drawback for banks in most parts 

1 16 " Statutes at Large," p. 274. 



THE CIRCULATION OF THE NATIONAL BANKS 357 

of the North and West, for it diverted an important fraction of their 
scanty capital from its primary function as a supply of loans for 
the local demand. For city banks, deriving any considerable aid 
from deposits, this locking up of capital might not be a serious 
difficulty, but for banks in sparsely settled districts it made the 
situation difficult. When failure to obtain the right of issue was 
added to the diversion of capital from loans to bonds, the country 
banks found themselves practically excluded from the national 
banking system and sometimes from all banking except as private 
banks. State banks under imperfect regulation or private bankers 
were then the chief resort for the deficient states and sections. 
Hampered in some degree these states and sections probably would 
have been in any case, being poor in capital and, at least in the 
South, unable for a time from political causes to secure a free 
supply of capital from outside ; but their situation, unfavorable 
in any case, was made far worse by the singular manner in which, 
the law had been made to operate upon them. 

With the great financial revulsion of 1873 the national banks 
and the legislation of Congress for their regulation entered upon 
a new stage of development. The complete prostration of busi- 
ness from the latter part of September, 1873, instantly checked 
the establishment of new banks, so that a comparison of the 
returns of September 12, 1873, and June 26, 1874, shows an 
increase of only seven banks and an absolute loss in both capital 
and circulation. A comparison by states shows that the sudden 
loss of inducements for the investment of capital in banking was 
universal. To a large party in Congress, however, this continued 
depression appeared to be the result of a deficient circulation, and 
not of that loss of confidence which must follow a panic under any 
system of currency whatever ; and the assembling of Congress 
was the signal, therefore, for a multitude of propositions for the 
increase of paper issues, for their extension, especially in the states 
poor in capital, and for warding off the supposed evils of contrac- 
tion and approach to the specie basis. On the other hand, the 
advocates of specie payments found the moment opportune for 
pressing the argument that the destruction of credit and the depres- 
sion of prices by the financial panic had already done the worst 
that could be feared from contraction, and that there was neither 
excuse for delaying resumption nor safety to be found without it. 



358 ESSAYS 

A wearisome debate of several months produced a bill for increas- 
ing the issue of legal-tender notes and of bank-notes to $400,000,000 
each, and this measure was vetoed by President Grant, after some 
vacillation which had nearly caused his approval of the measure. 
Congress, then, after two months of further consideration, passed 
a bill which became a law June 20, 1874, by which $30,000,000 was 
added to the sum of $25,000,000 which, under the act of 1870, was 
to be withdrawn from banks in states having an excess of bank 
currency under the legal allotment and distributed in states found 
to be deficient. 1 The act further provided for discontinuing the 
redemption of bank issues by agents in the redemption cities, and 
substituted the method of actual redemption at the Treasury of 
the United States, every bank being required for that purpose to 
maintain in the Treasury a deposit of cash equal to five per cent 
of its outstanding circulation. 2 The law also made an important 
provision for the relief of banks which found the right of issue 
unimportant, by authorizing any bank, upon the withdrawal or 
reduction of its circulation, to reduce its deposit of bonds to any 
amount not less than $50,000. 

Of these provisions of the act of 1874, those relating to treasury 
redemption and to reducing the deposit of bonds are still in force 
and have never ceased to be regarded as valuable improvements, 
defective only from their failure to go far enough. Although suc- 
cessive Comptrollers have seen in treasury redemption only a pro- 
vision for securing a physically clean issue of notes, it has been 
the means of sifting out from the mass of notes somewhat more 
certainly and expeditiously the issues of insolvent or closing banks, 
and has also done something to maintain the theory of a system 
of central redemption, which a turn of affairs might almost any day 
have made important. The diminution of the compulsory invest- 
ments in United States bonds was a step toward freeing the banks 
from making more use of the right of issue than their business 
naturally required. Banks of small capital, required to invest one- 
third of it in bonds, were left under the necessity of using the 
credit which so large an investment would afford. 3 Still, the act 

1 18 " Statutes at Large," p. 123. 

2 The notes ceased to be subject to the general reserve requirements which had 
hitherto applied to them as well as to deposits. 

3 Mr. Knox, the Comptroller, had advised, in 1872, that the requirement be reduced 
to a deposit of $10,000 of bonds. 



THE CIRCULATION OF THE NATIONAL BANKS 359 

of 1874 left the larger banks, for whom $50,000 invested at a low 
return was not so serious a matter, more freedom of action than 
had been allowed them before, and so had some tendency to dimin- 
ish issues in the important banking centres, and, therefore, to 
make room for increase of issues elsewhere. 

So far as the act of 1874 provided for the redistribution of apart 
of the bank circulation, it followed the line marked out by previous 
legislation, and endeavored by small and temporary adjustments to 
arrive at such an apportionment of a limited issue as should satisfy 
the most clamorous of present needs. If the new provisions 
had been long-lived, the question of some fresh adjustment must 
have come before Congress before long in the familiar form of a 
contest between the thriving younger states and the richer banking 
communities of the East ; but happily the moment was near when 
decisive measures for the return to specie payment destroyed all 
anxiety as to the allotment of bank issues. In fact, the stress of 
the times began to narrow the field for circulation even before the 
passage of the resumption act. The returns of the banks for 
October and December, 1874, showed a loss in circulation of more 
than $7,000,000 for the last half of the year. This was the net 
result of new or increased issues of notes on the one hand, and of 
still more important surrenders of issue on the other, irregularly 
distributed, and showing important changes of banking conditions 
in particular states. Down to November 1, New York and 
Missouri each surrendered more than $2,000,000 ; Kentucky, Indi- 
ana, and Illinois together received more than $2,ooo,ooo. 1 The 
Comptroller reported at the beginning of the session that the with- 
drawals of notes by some banks and the liquidation of others placed 
at his disposal $14,200,000 of circulation, probably enabling him 
to satisfy demands from new banks for some months to come. 2 

The demand for the right of issue was declining, therefore, when 
Congress, by the resumption act of January 14, 1875, 3 providing for 
a return to specie payment in 1879, repealed all provisions of law, 
fixing a limit to the aggregate of bank circulation, and thus intro- 
duced free banking from the date of the act. The present narra- 
tive does not call for any review of the circumstances under which 
the resumption act was passed, or any estimate of it as a measure 

1 Comptroller's Report, 1874, p. 128. 2 Ibid., p. 129. 

3 18 " Statutes at Large," p. 296. 



360 ESSAYS 

for carrying out a great reform. It succeeded, and by making the 
greenback redeemable in coin brought the banks also to a coin basis 
on the day appointed. The introduction of free banking was an es- 
sential part of the plan of operations by which this was to be effected. 
The act contemplated the substitution of national bank-notes for 
greenbacks and the possible reduction of the latter by this process 
to $300,000,000, as a preliminary for the safe resumption of pay- 
ment on the remainder. The issue of bank-notes was made free, 
therefore, with the cautious provision that as fast as notes should be 
issued to new banks or to banks increasing their circulation, legal- 
tender notes should be withdrawn to the amount of eighty per cent 
of the bank-notes thus issued, this arrangement resting on the 
calculation that an issue of bank-notes would in its practical work- 
ing imply a reserve of not far from twenty per cent, so that the 
effective addition to note circulation by the banks would be toler- 
ably well offset by the withdrawal of greenbacks, and no important 
change be made, therefore, in the amount of paper in circulation. 

The course of affairs in the next few years defeated many pre- 
dictions as to the operation of the resumption act. The depression 
which had followed the great revulsion of 1873 continued and even 
deepened in the years from 1875 to 1878. The loans of banks 
fell off somewhat in the general stagnation of business, and it was 
not until 1879 was well advanced that the banks again had full 
employment for their funds. But these discouraging conditions did 
not act uniformly upon all sections nor upon all localities or banks in 
any one section. In some cases additional banking capital and cir- 
culation was called for, and in others banks reduced their circula- 
tion as allowed under the act of 1874, or even went into liquidation ; 
and thus the actual change which took place was the net result of 
two opposing movements. For the last half of 1874 the issues of 
new circulation somewhat exceeded the withdrawals; but in 1875 
the withdrawals exceeded the new issues, and in 1876 the decline 
of bank circulation was strong. For the year ending November 1, 
1876, with issues of new circulation amounting to a little more 
than $7,000,000, the amount retired under the act of 1874 was over 
$24,392,255, the amount retired by banks in liquidation was $3,114- 
726, and $4,022,883 was surrendered by banks not relinquishing 
the right of issue. This made a net loss of circulation of about 
$24,000,000, in which all the sections and nearly all the states par- 



THE CIRCULATION OF THE NATIONAL BANKS 36 1 

ticipated, although in unequal proportion. 1 The year ending No- 
vember 1, 1877, also showed some excess of withdrawals, although 
a considerable increase was shown by New York and New England. 
The tide turned in the year ending November 1, 1878, and in 1879 
the national bank circulation had its part in the general activity. 
That its inability to grow under the freedom of the resumption act 
was in part the result of general business conditions is clear from 
the fact that the dividends of the national banks fell from 10.96 
per cent of capital and surplus in 1873 to 5.49 per cent in 1879; 
and that the aggregate surplus of all the banks in the system, 
which had steadily gained until the middle of 1875, from that 
point fell as steadily until the middle of 1879, declining from 
$133,000,000 to $114,000,000. 

But besides the discouragement which the banks at this time 
felt in common with all business interests, they had begun to suffer 
from one special depressing influence, which was destined to have 
a lasting effect on their gains from the right of issue. In 1870, 
of the bonds deposited by the banks to secure their circulation, 
nearly three-quarters bore interest at 6 per cent and the remainder 
at 5 ; by 1876 the refunding of the former had gone so far that 
less than one-third of the bonds on deposit were 6 per cents ; by 
1879 more than one-third of the bonds were at 5 per cent; and 
in 1883 the deposit of $348,000,000 was made up of $41,000,000 
at 4J, $106,000,000 at 4, and $201,000,000 at 3. The circulation of 
the banks, which from the end of 1879 to the end of 1881 had fluctu- 
ated between $300,000,000 and $325,000,000, began to decline in 
1882 and was withdrawn with some regularity until in the first 
half of 1891 it stood at about $123,000,000. The turning-point 
was reached when in the summer of 1891 the price of the United 
States 4 per cents fell enough to return to the purchasers of bonds 
nearly 3 per cent and the circulation slowly increased until in May, 
1 893, it had reached $ 1 50,000,000. During the summer many banks 
took out further circulation to supply the demand for money suitable 
for everyday use, the dearth of which was one of the most striking 
features of the crisis of 1893, and by October the total note issue 
stood at $183,000,000. 

1 The New England and Middle states lost in circulation $11,800,000; the Central 
states, $7,300,000 ; the South and Southwestern states, $4,300,000. — Comptroller's Re- 
port, 1875, p. 253, and 1876, p. 262. 



362 ESSAYS 

In the disturbed years which followed the issue fell slightly, 
then rose to nearly $211,000,000 at the end of 1896, with a further 
increase of the earning power of the investment in bonds, and dur- 
ing the three years following fluctuated between $191,000,000 and 
$2 1 SjOOOjOOO. 1 The experience of these years proved that the expan- 
sion or diminution of national bank currency was powerfully affected 
by an influence quite distinct from the need of bank currency for use 
by the public. Mr. Chase, when advocating the adoption of the 
national system, had foreseen the possibility that payment of the 
public debt might compel "a future generation" to find for 
the bank-notes some security other than United States bonds, 2 but it 
probably did not occur to him or the other founders of the system 
that the rise of public credit by itself might cause the curtailment 
and even threaten the extinguishment of the note issue. 

The unexpected results of the bond requirement were of course 
moderated by the wise provision of the act of 1874, referred to 
above, making $50,000 the maximum amount of bonds which a 
national bank is compelled to deposit. But even with this mate- 
rial modification the bond requirement has been a serious element 
in determining the geographical distribution of the national banks. 
The causes which to a considerable extent excluded many states 
in the South and West from taking any important share in the 
system down to the passage of the resumption act in 1875 have 
already been stated. In the years of depression which followed, 
ending with the actual resumption in 1879, these sections suf- 
fered serious losses in national bank capital and circulation, los- 
ing far more than their proportion of the total diminution in the 
United States. The great revival of business which began in 1879 
and the improved political and industrial condition of the South in- 
creased the need of banking facilities and made it easier to provide 
the necessary capital, but any considerable expansion of national 
banking in the South and West, except in a few of the wealthy 
and rapidly growing states of the Middle West, was then checked 
by the rising value of government securities and the consequent 
low return afforded by them. The distribution of the national 
banks therefore underwent little change. The system continued 

1 See a table giving the investment value of United States bonds, in the Report of 
the Comptroller of the Currency, 1899, p. 411. 

2 Finance Report, 1862, p. 20. 



THE CIRCULATION OF THE NATIONAL BANKS 363 

to thrive in the great belt of states north of the Potomac and 
Ohio rivers, finding increasing difficulty as it crossed the Mis- 
sissippi. The sparsely settled states, having in the nature of 
the case the strongest need of banks of issue, still found them- 
selves practically cut off from the advantage of the national 
system. 

Some relief from this difficulty might have been obtained, per- 
haps, from the establishment of branches by the banks of urban 
communities, but this practice is not now permitted by the statutes 
of the United States, 1 and, although it has always existed in this 
country to some extent as in the days of the first and second banks 
of the United States and among state banks under the laws of some 
states, there has been a strong disinclination to introduce it in the 
national banking system. Palliatives have been discussed, such as 
a diminution of the minimum capital with which a national bank 
can be established, in order to bring national banking within the 
reach of smaller communities, or the increase of the note issue to 
the par value of the bonds deposited, instead of limiting it, as hereto- 
fore, to ninety per cent of that value ; but these measures obviously 
do not go to the root of the evil complained of. Far more radical 
is the proposed abandonment of the principle of a specially 
secured currency and the substitution of a prior lien upon 
the general assets of the issuing bank, with perhaps a revival of 
the systematic central redemption of notes, formerly practised in 
some of the states and now in vogue in Scotland and in Canada. 

In the meanwhile, the states and sections which found the 
national bank system ill adapted by its requirements to their con- 
dition have sought relief in many cases by an extraordinary de- 
velopment of banking under state laws. Banks with as small a 
capital as $10,000, and in Kansas, Nebraska, and the Dakotas 
only $5000, have organized by the hundred, having no power of 
note issue, of course, and in many cases with singular looseness 
of control by the state authority. By these agencies the states in 
question have secured a rapid increase of bank facilities, with 
some neglect of provisions for its soundness. Their needs of 
tangible currency for use are necessarily variable, and to satisfy 

1 For the purposes of the Columbian Exposition of 1893, a special act of Congress was 
passed, authorizing for two years the existence of branch offices of Chicago banks on the 
exhibition grounds. — 27 " Statutes at Large," p. 33. 



364 ESSAYS 

them the movement of large masses of government or bank notes 
from the states farther east is annually required. But the inelastic 
quality of issues, whose volume depends in great degree upon the 
attractiveness of an investment in bonds, makes this annual flow 
of currency a disturbing event and not seldom the cause of seri- 
ous disturbances in the money market. It follows, therefore, that, 
while the national banking system has created an issue of notes 
of undoubted solidity, and of equal value in every part of the 
Union, as the founders of the system expected, it has not yet 
created a system of banking adapted to the wants of all sections 
or tending to unify their interests. The national system is no 
doubt the foundation on which any reorganization of the paper 
currency of the United States ought to rest, but it is still only 
a foundation, with the superstructure scarcely more advanced 
than it was a generation ago. 



INDEX 



Adams, Henry, on character of Hamilton's 
reports, 74. 

Adams, J. Q., report of, on weights and meas- 
ures, 23. 

Alabama, direct tax of 1861 in, 105. 

Amsterdam, banking in, 132, 142, 145. 

Antwerp, 147. 

Apportionment of national bank-notes, by the 
act of 1863, 335; repealed 1864, 340; re- 
newed 1865, 346; legal and actual state 
quotas in 1865, 347-348; explanation of 
disregard of law for, 348-350; effects of, 
on distribution of the banks, 350-352; 
act of 1870 for, 353; legal and actual in 
1873, 355 ; act of 1874 for, 358 ; repealed 
in 1875, 359. 

Arkansas, collection of direct tax of 1861 in, 
105 note ; banks unconstitutional in, 270. 

Bagelot, W., on condition of economic 
thought, 40 ; on deposits, 175. 

Baltimore, banks of, in the crisis of 1857, 280, 
288 ; in the crisis of i860, 301, 309. 

Baltimore Plan, nature of, 234; chief defect 
of, 243. 

Banco del Giro, founding of, 156 ; organiza- 
tion of, 157-158 ; history of, 159-161, 166- 
167; effect of suspension on value of 
currency of, 161-165. 

Banco di Rialto, establishment of, 153 ; func- 
tions of, 153-155 ; close of, 156. 

Banking, the facilitation of payments at first 
its chief function, 145-148; the use of 
credit the source of profit in, 183. 

Banking, Free, in New York, 270, 297, 317, 
321-322; in the West, 271, 297, 310, 323- 
325 ; list of states permitting, in i860, 322 
note. 

Banking in Venice, influence of, in England, 
135-136, 140-141 ; legendary origin of, 
143; works on, 144-145, 166; private, 
145-153; suppression of, 153; Banco di 
Rialto, 153-155, 156; renewal of private, 
155-156; Banco del Giro, 155-167. 

Bank-notes, depreciation of, 163, 287-288; 
analogous to deposits, 173 ; the subject of 
far more legislation, 174; deposit cur- 



rency renders, less important, 179-181; 
government notes not a substitute for, 184 ; 
state laws concerning, 192. See Elasticity, 
and National Bank-notes. 

Bank of Commerce, special provision to 
secure adhesion of, to the national bank- 
ing system, 341. 

Bank of England, model for the first bank of 
the United States, 90-93 ; publication of 
accounts of, 171 ; relation of, to gold ex- 
ports, 257; and the crisis of 1857, 277, 
279, 286 ; analogy between suspension of 
Peel's act and the use of clearing-house 
loan certificates, 308. 

Bank of France, and gold exports, 257. 

Bank of New York, constitution of, written 
by Hamilton, 90 note. 

Bank of the United States, First, a Northern 
measure, 17; services of, 18; the Bank of 
England taken by Hamilton as a model 
for, 90-93 ; accounts of, 168-171 ; notes 
and deposits of, 174. 

Bank of the United States, Second, conse- 
quences of the war against, 18-19. 

Banks, projects for, in England, 1581-1678, 
13S-142. 

Banks, State, deposits of, 177-178 ; attractions 
of, compared with national banks, 184; 
bills for repeal of tax on notes of, 188 note ; 
legislation regulating, 188-190, 192; geo- 
graphical distribution of, 190-191, 230- 
233 ; growth of, with small capital, 195-197, 
235, 362 ; repeal of tax on notes of, undesir- 
able, 198-206; issue of national currency 
by, allowed in act of 1863, 202-203, 336, 
338 ; repealed in 1864, 341 ; character and 
situation of, in 1857, 269-271 ; effect of the 
crisis of 1857 on, 287-288; position of, 
prior to crisis of i860, 296-299 ; effect of 
crisis, 309-310; survey of, in i860, 314- 
329; the government not concerned with, 
after 1846, 314; diversity of system, 315; 
distribution of, 315-316; under special 
charter, 317; in New England, 318-320; 
in New York, 317, 321-322 ; free banks in 
the West, 323-324 ; discount on notes of, 
324 ; counterfeiting notes of, 324-325 ; 



365 



366 



INDEX 



banks of the States, 325-329 ; entrance of, 
into the national system in 1863, 337 ; in 
1864, 341 ; enabling acts for, 342-343 ; tax 
on notes of, 343-344. 

Bascom, J., economic writings of, 12. 

Bastiat, F., influence of Carey on, 14 ; reason- 
ing of, affected by ethical aims, 49. 

Bigelow, E. B., on protection, 23. 

Bonds of the States, fall of price of Southern, 
in i860, 301 ; losses on Western bank- 
notes secured by, in i860, 310; use of, 
as security by free banks in the West, 323. 

Bonds of the United States, requirement of, 
burdensome to small national banks, 232- 
234, 358 ; sale of, in 1894-1896, 222 ; pur- 
chase of, by the treasury in 1857, 281 ; 
price of, in 1857, 285 ; sale of, in i860, 
301; slow sale of, in 1862,334; effect of 
requirement of, from national banks on 
sale of, 33s ; holdings of, by national and 
state banks in 1864, 337-338; require- 
ment of, from national banks changed 
in 1864, 358 ; relation of national bank 
circulation to price of, 361. 

Boston, banks of, in the crisis of 1857, 278, 
282, 283, 288; in i860, 300; policy of, in 
the crisis of i860, 309; pressure exerted 
on county banks, 319; banks of, enter the 
national system, 342. 

Boutwell, Secretary, proposal of, to retire the 
legal tenders, 211. 

Bowen, F., economic writings of, 12. 

Bowery Bank, failure of, 283. 

Branch banking, advantages of, 196-197; 
would improve the national banking sys- 
tem, 363. 

Breckenridge, R. M., on Canadian bank- 
notes, 242 notes. 

Briscoe, J., 142. 

Buckner, Congressman, on bank-notes, 181 
note. 

Cairnes, J. E., on economic method, 30, 31, 

34. 35- 38, 39. 47- 

Calhoun, J. C, as an economist, 9. 

California, gold of, 314. 

Canada, redemption of bank-notes in, 242; 
banks of, successfully meet the crisis of 
1857,284. 

Cantillon, R., cited, 164 note. 

Capital, state banks in the West and South 
with small, 191, 195, 235, 363; reduction 
of, required from national banks undesir- 
able, 236 ; relation of foreign investments 
of, to gold movements, 253-258. 

Capitation tax, 97. 

Carey, H. C, writings of, 14-16 ; quoted, 47. 

Carlisle, Secretary, cited, 236 note. 

Carlyle, Thomas, quoted, 5. 



Carriage tax, case of Hylton v. United States, 
97, 101. 

Central America, loss of steamer, 280. 

Chamberlayne, H., 142. 

Chase, Secretary, on the meaning of direct 
taxes in the Constitution, 98 ; direct tax pro- 
posed by, in 1861, 101 ; national banking 
proposed by, in 1861, 330-332; renewed 
in 1862, 333-336 ; carried by influence of, 
335 ; foresaw end of present system of note 
issue, 362. 

Chemical Bank, 283, 308. 

Clarke, F., comptroller of the currency, 239 
note, 247. 

Clay, Henry, as an economist, 9. 

Clearing-house of New York, returns of, in 
1857, 281, 286; established in 1851, 322. 

Clearing-house loan certificates, use of, in 
i860, 307-308. 

Cohn, G., method of, 42. 

Coinage, legislation concerning, more stable 
than that for government paper, 220. 

Collamer, Senator, on the direct tax of 1861, 
101 note ; proposal by, in 1864, of a coin 
reserve for national banks, 345. 

Columbian Exposition of 1893, 3^3 note. 

Colwell, S., 12, 16 note, 155 note. 

Competition, disappearance of, under branch 
banking improbable, 237. 

Compound-interest, notes of 1864-1865, 353. 

Connecticut, banks of, in i860, 320. 

Contarini, D., bank of, in Venice, 1597, 155. 

Contarini, T., speech of, on Venetian bank- 
ing, 144, 147-150. 

Cooke, T„ on the distribution of banks in the 
West, 235-236. 

Cooper, Thomas, 11. 

Cotton, importance of American, 2, 251-252. 

Cotton manufacture, effect of the crisis of 
1857 on, 290. 

Counterfeiting of bank-notes, 324-325 ; New 
England Association for the suppression 
of, 325. 

Courtois, A., on deposits, 176 note. 

Cradocke, F., banking projects of, 138-140. 

Credit, long terms of, prior to crisis of 1857, 
269, 291, 298. 

Creditor countries, power of, over gold move- 
ments, 256-258. 

Crisis of 1857, causes of, foreign trade, 266- 
269; banking operations, 269-272; rail- 
road speculation, 272; general economic 
conditions prior to, 274-276 ; condition of 
the banks, 276-278; outbreak of, 279; 
mistaken policy of New York banks, 
280-282 ; suspension of specie payments, 
282-284; business paralysis, 284-285; 
improvement after suspension, 285-287; 
discredit of Western banks, 287-288; 



INDEX 



367 



resumption, 288-289; effects of the crisis 
on land and railroad speculation, 289 ; on 
labor, 289-290; recovery from, 291-293. 

Crisis of i860, conditions prior to, 294-299; 
the political situation, 299-300; the posi- 
tion of the banks, 300 ; monetary pressure 
in October, 301 ; Lincoln's election followed 
by panic, 302; course of, 302-305; relief 
measures of New York banks, 305-308 ; 
of Boston banks, 309; suspension of 
specie payments in the South and West, 
309-310; specie movement during, 311; 
slow recovery from, owing to non-pay- 
ment of Southern debts, 312-313. 

Crisis of 1873, 20; effect of, on national bank 
circulation, 317. 

Crisis of 1893, effect of, on American im- 
ports, 250-251 ; effect of, on national bank 
circulation, 361. 

Currency, U. S., summary history of, 16-21; 
morbid fear of contraction, 172, 219; 
profit from government unimportant, 183, 
225-226; unsteady purpose in legislation 
concerning, 216-224; elements of, in 1857, 
272. See National Bank-notes, Treasury 
notes, and U. S. notes. 



Daru, P. A., cited, 145, 164 note. 

Debtor countries, relation of, to gold move- 
ments, 253-256. 

Deductive method in economics, analysis 
of, Mill's use of, 31-34; constant use of, 
by writers of the historical school, 41-44. 

Deposits, early use of, in Venice, 149 ; a cur- 
rency more important than bank-notes, 
173; true nature seen by Hamilton and 
Gallatin, 173-174; explanation of failure 
to recognize their true nature, 174-176 ; 
statistics of, in the United States, 177-179 ; 
use of, renders fear of currency contrac- 
tion illusory, 179 ; payment of interest on, 
276, 292. 

Dew, T. R., 12. 

Direct taxes, ineffectiveness of national in 
the United States, 94; conception of, de- 
rived from the physiocrats, 95-97 ; prece- 
dents for levying by apportionment, 97; 
judicial determination of, 97-98, 107, 133; 
imposition of, in 1798, 98; in 1813, 99; in 
1815, 100 ; in 1861, 100; assumption of, by 
the loyal states, 103; proceeds of, 104; 
collection of, from the seceded states, 
104-105 ; collection of, discontinued, 106 ; 
amount of, uncollected, 108 ; collection 
of, in South Carolina, 109-110; proposed 
methods of refunding, 111-113; refund- 
ing of, 114. 

Dividends of national banks, 350, 361. 



Duhring, Dr., quoted, 15. 

Dupont de Nemours on direct taxes, 96. 

East River Bank, failure of, 283. 

Economic science in America to 1876, the 
development of the country a favorable 
field for, 1-6 ; writings of statesmen, 6-10 ; 
of scholars, 11-16; meagre results of, 16; 
political conditions unfavorable to, 16-21 ; 
practical aspect of American life unfavor- 
able to, 22-25 ; disregard of teachings of, 
25-28 ; greater development and influence 
of, in the future predicted, 28-29. 

Economics, leading position of England in, 
1 ; held by Germany in 1876, 2 ; the re- 
action in, 30; analysis of the deductive 
method in, 31-34; scope of the conclu- 
sions of, 35 ; meagre results of, 36 ; direction 
of further progress indicated, 38-40; the 
inductive or historical school in, 40; its 
methods, 41-46; its attitude toward the 
State, 46 ; the place of laissezfaire in, 47 ; 
the place of ethical considerations in, 48- 
49 ; value of historical movement to, 50- 
51 ; increasing academic importance of, 
52-53 ; and in public estimation, 53 ; posi- 
tion of, in American universities, 54; 
scientific method in its study, 55-56; 
special treatment demanded for subjects 
under public discussion, 56-59; an im- 
possible demand, 59-60; the determina- 
tion and application of economic laws, 
61-64 '. the proper attitude of the teacher 
of, 65-67. 

Edmunds, Senator, on the reissue of the legal 
tenders, 240 note. 

Elasticity of bank-notes, true meaning of, 
237-238 ; absent in case of national bank- 
notes, 240 ; importance of, 241 ; redemp- 
tion the only means of securing, 242. 

Elder, Wm., a disciple of Carey, 16. 

Election of i860, attitude of North and South 
prior to, 299 ; economic effect of, 300. 

Ely, R. T., quoted, 41, 45 note. 

Enabling Acts, for state banks entering the 
national system, 342. 

England, financial experience of, closely fol- 
lowed by Hamilton, 74; land tax of, 97, 
99 note ; smoothly working taxation sys- 
tem of, 118; income tax of, 120 note, 121, 
126-127, 131 ; early banking schemes in, 
135-142 ; relative importance of notes and 
deposits in, 176; branch banking in, 196 
note ; stable currency system of, 215, 225 ; 
ability of, to attract gold, 257; gold im- 
ports and exports of 1882-1898, 260-264. 

Erie railroad, bankruptcy of in 1857, 282. 

Ethics, relation of, to economics, 48-49. 

Europe, commercial situation of, in 1857, 274. 



368 



INDEX 



Everett, A. H., economic writings of, n. 

Fairchild, C. S., on foreign exchange, 257 note. 
Ferrara, F., investigations of, in Venetian 

banking, 144 ; frequent references to, 144- 

166. 
Florida, collection of direct tax of 1861 in, 

105 note ; banks unconstitutional in, 270. 
Foodstuffs, American exports of, 252 ; Euro- 
pean demand for, in 1858-1859, 295 ; in 

i860, 298-299. 
Foreign exchange, movement of, in crisis of 

1857, 274, 277, 279, 281, 284, 286; in crisis 

of i860, 304, 311. 
Foreign investments, advantages from, in the 

United States, 253; effect of, on gold 

exports, 254-258. 
Foreign trade of the United States, analysis 

of, 249-252; from 1850 to 1857, 266-269; 

in 1857, 274-275 ; from 1858 to i860, 289, 

295-296. 
Fourth National Bank of New York City, 

340 note. 
France, economic science in, 1; bankruptcy 

of, in 1790, 74 ; stable currency system of, 

215, 225; gold exports and imports of 

1882-1898, 260-264. 
Franklin, Benjamin, the economic writings 

of, 6-7. 

Gage, Secretary, on the monetary system of 
the United States, 257 note, 262 note. 

Gallatin, Albert, economic writings of, 9 ; on 
the public debt, 79 note, 88 ; the direct 
tax, 99, 101 note ; accounts of the first 
bank of the United States, 168-170 ; recog- 
nized the true nature of deposits, 174. 

Garfield, J. A., on the position of silver as a 
legal tender, 354 note. 

Geneva award, 254 note. 

Georgia, collection of the direct tax of 1861 in, 
107. 

Gerbier, B., banking plan of, 139 note. 

Germany, economic science in, 2, 54; stable 
currency system of, 216, 225 ; gold imports 
and exports of 1882-1898, 260-264. 

Gibbs, G., cited, 73 note. 

Gold, California, 3, 266; unprecedented in- 
crease of, in the United States in 1898, 
248 ; export demand for, concentrated on 
the Treasury, 249 ; advantages of the U. S. 
for retaining, 250-253 ; debtor position 
of the U. S. not a disturbing factor, 253- 
256; comparison with England, 257-260; 
exports and imports of leading countries 
compared, 260-264; consumption of, in 
the arts, 364 ; amount of, in the U. S. 
in 1899, 264-265 ; disposition of holdings 
of U. S. banks, 1862-1865, 344-345. 



Gold Bill, 209. 

Gold reserve of the United States, borrowing 
for, 222; gold for export taken from, 249. 
Grant, President, vetoes inflation bill, 212, 358. 
Grist, F. R., 160 note, 161 note. 
Grocer's Bank, failure of, 283. 
Grosvenor, W. M., 23. 

Hackett, F. W., cited, 254 note. 

Hagenbuck, C, bank proposed by, 135. 

Hamilton, Alexander, economic writings of, 
7-8; congressional request for report on 
the finances, 72 ; previous training of, 73 ; 
reliance upon English experience, 73-74 ; 
plan of, for refunding, 75-76 ; comparison 
with English precedents, 76-79; not a 
plan for a permanent debt, 79-81 ; views 
as to the benefits of a public debt, 81-82; 
sinking fund, proposal of, 82-89; early 
banking ideas of, 89-90, 93 note ; plan of, 
for the first bank of the United States, 90- 
93 ; rank of, as a financier, 93 ; on direct 
tax, 95 ; true nature of deposits explained 
by, 173- 

Harrison, President, attitude of, toward free 
silver coinage, 221. 

Harter, M. D., currency proposals of, 193, 
201-203. 

Hill, J. A., cited, 125 note, 127 note, 133 note. 

Historical school in economics, methods of, 
40-44; attitude of, toward State interfer- 
ence, 45. 

Hooper, S., bill of, for national banks, 332 note. 

Hulburd, H. R., comptroller of the currency, 
239 note, 348 note. 

Huskisson, cited, 83 note. 

Illinois, banks of, in i860, 302, 310, 323-324; 
proposed State Bank in, 328. 

Illinois Central Railroad, bankruptcy of, in 
1857, 282. 

Immigration to the United States, 4; effect 
of crisis of 1857 on, 289. 

Impot fonder, 97. 

Income tax, principle of sound, 117; defects 
of, 118; fiscal advantages of, 118; of Eng- 
land, 118, 120 note, 121, 126-127, 131; of 
Prussia, 120 note, 121, 127-128, 131; of 
1864, 120, 122, 123, 125. 

Income tax of 1894, explanation of its enact- 
ment, 116; a badly devised measure, 117; 
inheritance provisions of, 120-122; deter- 
mination of income, 123-127 ; assessment 
at the source, 128-130 ; levied on past 
income, 130-132; declared unconstitu- 
tional, 133. 

Independent Treasury, necessity for, 19 ; es- 
tablishment of, 314; national banks ex- 
pected to supplement, 334. 



INDEX 



369 



Indiana, free banks of, in i860, 323; Bank of 
the State of, 325 ; State Bank of, 326. 

Inductive method in economics, use of, not 
confined to the historical school, 40-43. 

Inflation, possibility of, from deposits as well 
as from notes, 185 ; desire of debtor com- 
munities, 192-194; does not provide a 
local currency if redeemable, 204-206. 

Inflation bill of 1874, 212, 358. 

Ingram, J. K., cited, 41 note. 

Interest on foreign investments in the United 
States in 1859, 296. 

International securities, effect of, upon gold 
exports, 255-256. 

International trade, advantages of the United 
States in, 249, demand for imports not 
urgent, 250-251 ; for exports imperative, 
251-252 ; subject to wide fluctuation, 252. 

Iowa, State Bank of, 327-328. 

Iron and steel, effect of crisis of 1857 on, 290. 

Italy, economic science in, 2. 

James, E., quoted, 38 note, 45 note. 

Jarvis, E., 23. 

Jefferson, President, as an economist, 8, 17 ; 
on Hamilton's public debt policy, 79 note, 
82 note; on the publication of bank ac- 
counts, 169, 170. 

Jevons, W. S., true nature of deposits not 
seen by, 175. 

Jordan, C. N., on the effect of the Sherman 
act of 1890, 262 note. 

Kansas, state and national banks in, 191, 231, 

235- 

Kentucky, banks of, maintain specie pay- 
ments in 1851, 283; and in i860, 309. 

Keynes, J. N., on the application of eco- 
nomic principles, 62 note. 

King, R., 94 note, 97, 

Kniess, K., function of deposits not per- 
ceived by, 177 note. 

Knox, J. J., 168, 355, 358. 

Labor, effect of the crisis of 1857 on, 289- 
290. 

Laissez /aire, its place in economics, 45-48. 

Lambe, S., banking projects of, 137-138. 

Land, public, railroad grants prior to 1837, 
272 ; effect of crisis on sale of, 289. 

Lattes, E., investigations of, in Venetian bank- 
ing, 144 ; frequent references to, 144-156. 

Laveleye, E., de, on economic method, 47 
note, 50. 

Lee, Henry, report on tariff duties, 23. 

Legal Tender Acts, passage of, 208-209, 
332-334. 
See United States Notes. 



Leroy-Beaulieu, P., quoted, 123. 

Lewis, M., banking pamphlets of, 140-142; on 
banking in Venice, 161 note, 163, 166. 

Lincoln, President, economic consequences 
of the election of, 299-302. 

List, F., 14, 16 note. 

Loan certificates of 1867 and 1868, 353. 

Louisiana, banks of, specie reserves of, strong- 
est in the country before the Civil War, 
271, 297. 

Lyons, fair of, 147, 152. 



Maclay, W., and the public debt, 79 note. 

McCulloch, J. R., 11, 34, 35, 47, 68. 

McCulloch, Secretary, opposed issue of na- 
tional currency by state banks, 203, 338; 
urged early resumption in 1865, 210 ; first 
president of the Bank of the State of 
Indiana, 327 ; disregard of the law appor- 
tioning national bank circulation, 347, 349, 

355 note - 

McLeod, H. D., on banking in Venice, 143 
note ; on deposits, 173. 

Madison, President, as an economist, 8; 
vetoes bank bill, 18 ; on the public debt, 
71-72. 

Maine, banks of, 318. 

Malpiero, 152 note. 

Malthus, reply to, by A. H. Everett, 11; by 
H. C. Carey, 15; method of, 34, 47. 

Malynes, G., 139, 161 and note. 

Manhattan Company, 320. 

Manufactures, effect of crisis of 1857 on, 290. 

Marperger, 144. 

Marshall, A., on economic laws, 64 note. 

Massachusetts, failure of tax on personal 
property in, 124 ; ratio of notes to deposit 
before i860, 175; forbids banks to pay 
notes of other banks, 242 ; effect of crisis 
of 1857 on note circulation of, 288 ; re- 
quires a specie reserve, 292 ; banking sys- 
tem of, in i860, 318-320; bond invest- 
ments of banks in 1864, 337. 

Mercier de la Riviere, on direct taxes, 96. 

Michigan Central Railroad, bankruptcy of, in 
1857, 282. 

Mill, J. S., 1, 14; economic method of, 31- 
34. 3 8 > 39. 47 ; quoted, 38, 53, 69, 117. 

Missouri, state and national banks in, 191, 
231 ; banks of, in i860, 310, 324 ; bonds 
of, largely held by Western free banks, 

323- 

Mithoff, Dr., cited, 42 note. 

Money, explanation of dearth of, in the West 
and South, 193, 204-206, 245-246, 356; 
distribution of, if redeemable, 204 ; if irre- 
deemable, 205. 

Morosini, quoted, 153 note. 



2B 



3;o 



INDEX 



Morris, Gouvemeur, author of constitutional 

provision for direct taxation, 94-95. 
Morris, Robert, 9, 89, 90. 
Moses, B., cited, 354 note. 

Nasse, E., cited, 147 note. 

National banking system, notes and deposits 
under, 178-180; note issue requirements 
check growth of, 182-185 ; loss from insol- 
vency, 186-187, 234; distribution of, 190, 
230-233, 362 ; unsuited to sparsely settled 
regions, 195, 233-236, 362-363; bond re- 
quirement burdensome, 196,231-233; also 
capital requirement, 196, 235 ; branches 
the suitable remedy, 196, 236 ; uniformity 
a valuable feature of, 199; legislation far 
more consistent than for legal tenders, 
224; certain changes urged, 246-247; 
Chase's proposal in 1861, 330-333; in 
1862, 333-335 ; act of 1863, 335-337 ; few 
banks organized, 337; defects of the act 
of 1863, 338-340; act of 1864, 340-341; 
rapid conversion of state banks, 341-343 ; 
accumulation of surplus by sale of gold, 
343-345; effect of the apportionment of 
circulation on the growth of, 346-359 ; pro- 
posed changes in, 363-364. 

National bank-notes, no double profit from, 
182-183 ; restrictions on issue check growth 
of the system, 185, 234 ; possible changes 
considered, 185-186; inelasticity of, 197, 
237; uniformity of, a great advantage, 
228 ; issue of, against assets favored, 234 ; 
redemption requirements, 238-240, 348- 
349. 358; similar to government paper, 
356 ; amount of, in circulation, 1874-1900, 
359-362. See Apportionment. 

National gold banks, 354. 

Nebraska, state and national banks in, 191, 
231, 233, 235. 

New Dry Dock Company, 321. 

New England, survey of banks of, in i860, 
318-320. 

New England Association for the Suppression 
of Counterfeiting, 325. 

New Hampshire, banks of, in i860, 318. 

Newman, S. P., 12. 

New Orleans, banks of, withstand the crisis 
of 1857, 283; in the crisis of i860, 297; 
suspend in 1861, 310. 

New York, banks of, in i860, 317, 320-322; 
bond holdings of, in 1864, 338. 

New York City, banks of, operation of, prior 
to the crisis of 1857, 275-276 ; already the 
reserve centre of the country, 276-277; 
during the crisis prior to suspension of 
specie payments, 278-283; after suspen- 
sion, 285-286 ; resolve in 1858 to require a 
twenty per cent reserve and against the 



payment of interest on deposits, 292; in 
i860, 300; loan certificate device resorted 
t0 . 3 5-3o8 ; unfavorable in 1864 to the 
national banking system, 337 ; enter sys- 
tem, 341-342; propose in 1864 that banks 
keep a coin reserve, 344. 
Noyes, A. D., cited, 259 note. 

Ohio, real estate mortgages in, 289; State 

Bank of, 327. 
Ohio Life Insurance and Trust Company, 

failure of, 279. 
Overstone, Lord, quoted, 293. 

Patten, S. N., cited, 52 note. 

Patterson, Justice, on the meaning of direct 
taxes in the Constitution, 97. 

Pennsylvania, citizens of, petition Congress 
for action on the public credit, 72 ; indus- 
tries of, depressed after the crisis of 1857, 
290 ; state election in i860, 300. 

Perry, A. L., economic writings of, 13. 

Philadelphia, banks of, in the crisis of 1857, 
280, 288; in the crisis of i860, 300, 309; 
beginning of national banking in, 337, 341. 

Phillips, Willard, as an economist, 7, 11. 

Physiocrats, relation of, to direct taxation in 
the Constitution, 95-96. 

Pinckney, C. C, 94 note. 

Pitt, William (the younger) , tontine measures 
of, 78 ; sinking fund arrangements of, 83- 
86. 

Pollock v. Farmers' Loan and Trust Com- 
pany, 133 note. 

Porter, A. G., 109 note. 

Potter, A., 12. 

Potter, W., banking project of, 136. 

Price, F. G. H., cited, 135, 136. 

Price, R., work of, on sinking funds, 83. 

Private banks, deposits of 1878-1882, 177-178. 

Prussia, income tax of, 120 note, 121, 127-128, 

131- 

Public debt of the United States, funding of, 
by Hamilton, 75-79; sinking fund for, 
82-89. 

Quesnay, F., on direct taxes, 96. 

Rae, John, 12. 

Railroads, speculative construction of, prior 
to the crisis of 1857, 272; effect of the 
crisis on, 282, 289. 

Raymond, D., economic writings of, 11. 

Reading Railroad, bankruptcy of, in 1857, 
282. 

Redemption of bank-notes, sole means of 
securing elasticity, 237; imperfect under 
the national banking law, 238-240; ad- 
vantages of, 240-242; methods for se- 



INDEX 



371 



curing, 243-244; equity of, 244-245; the 
Suffolk system, 319; in New York and 
Philadelphia in i860, 322 and note ; pro- 
vision for, in the national banking law 
of 1863, 335 ; of 1864, 340 ; of 1874, 358. 

Reichbank and gold exports, 257. 

Republican Convention of 1868, opposes re- 
pudiation, 2X1. 

Reserves of other banks largely held in New 
York in 1857, 276; of banks in 1859, 
297 ; requirement for national bank notes 
changed in 1874, 358. 

Resources of the United States in 1876, 2-4. 

Resumption act, exact meaning of, purposely 
left uncertain, 172, 212-213 ; removed limit 
on total circulation of the national banks, 

359- 

Resumption, see Specie payments. 

Rezasco, cited, 156 note, 157 note, 159. 

Rhode Island, cotton manufactures of, de- 
pressed after the crisis of 1857, 290 ; banks 
of, in i860, 318. 

Ricardo D., American edition of, 11 ; theories 
of, disputed by Carey, 14; economic 
method of, 34, 39, 68-70 ; on Pitt's sinking 
fund, 84 note. 

Richardson, Secretary, reissue of legal tenders 
in 1873 by, 212. 

Roberts, L., cited, 139. 

Robinson, H., cited, 139. 

Rogers, Thorold, investigations of, 44. 

Roscher, William, cited, 16; method 0^42,44. 

Rota, cited, 158 note, 164 note. 

Royall, W. L., quoted, 245 note. 



Savary, cited, 144 note. 

Schmoller, G., method of, 41, 44. 

Schoenberg, Dr., 45 note. 

Scotland, branch banking in, 196 note. 

Seligman, E. R. A., quoted, 40. 

Senior, N. W., economic method of, 34, 35, 
47. 49- 

Sherbrooke, Lord, quoted, 37. 

Sherman, Senator, on the direct tax, 114 note ; 
on resumption, 172 ; on legal tender notes, 
209, 2ii, 212, 240, 241; on national bank- 
notes, 238, 347, 351. 

Shipping of the United States, 1850-1857, 228. 

Silver Coinage Act of 1853, 270. 

Silver Purchase Act of 1890, passage of, 214; 
repeal of, 215 ; explanations of its passage, 
221 ; consequences of, 262. 

Sinking fund, Hamilton's opinion as to the 
importance of, 80-82; of 1862, 81 note; 
proposal of, for the Confederation, 82 note ; 
of the younger Pitt, 83-84 ; Ricardo's criti- 
cism, 84 note; Hamilton's proposals, 85; 
commissioners for, 85 note ; of 1790, 85 ; 



of 1792, 86; of 1795, 87; of 1802, 88 ; views 
of Hamilton and Pitt sound, 88-89. 

Smith, Adam, influence of, on Franklin, 7; 
on Hamilton, 8 ; on the method and 
limitations of economics, 34, 35, 37, 47, 62 ; 
taxation terms used by, 95. 

Smith, E. P., 16. 

Soresina, A., on Venetian banking, 166. 

South Carolina, collection of direct tax in, 
105 note, 109-110; refunding of, in, 114. 

South The, national and state banks in, 230- 
233 ; national system unsuited to needs of, 
233-236, 362-363; explanation of dearth 
of currency in, 245-246 ; use of credit in, 
prior to 1857, 269 ; rapid recovery of, from 
the crisis of 1857, 291, 294; during the 
campaign of i860, 299 ; Northern loss on 
debts of, in 1861, 303, 312; apportionment 
of circulation in 1865, 347-348; checks 
growth of national banks in, 351, 354-355. 

Spaulding, E. G., national bank bill of, 332 
note. 

Specie, natural effect of exports of, thwarted 
under our currency system, 240-241 ; 
movement of, during the crisis of 1857, 
277, 279, 286 ; during the crisis of i860 ; 
302, 304, 311 ; held by the banks, 1863- 
1868, 344-345- 

Specie payments, suspension of, in 1857, 280- 
284 ; resumption of, 288 ; suspension in 
1860,309-310; in 1861, 331; proposal in 
1864 that banks prepare for resumption, 
344 ; public opinion in 1865 favorable to, 
348 ; resumption in 1879, 359- 

Springer v. United States, 98. 

Stanhope, Lord, 84 note. 

Stevens, T., quoted, 101 note. 

Suffolk bank system, the, 319. 

Sugar, 291 ; speculation of 1857 in, 275. 

Surplus of national banks, required by act of 
1864, 339, 340 ; from the sale of gold, 344- 
345 ; amount of, 350, 361. 

Taille reelle, 97. 

Tariff, varying policy as to, 26 ; demand for 
unscientific teaching of, 157 ; of 1890, and 
the Silver Purchase Act, 221 ; ad valorem 
system of 1846, 268. 

Taxation, of personal property ineffective, 124 ; 
of state bank-notes, 343. See Direct Tax 
and Income Tax. 

Teller, Senator, on the Silver Purchase Act of 
1890, 221. 

Tennessee, collection of direct tax in, 105 
note. 

Texas, number and bond-holdings of national 
banks in, 230-233 ; state banks unconstitu- 
tional in, 232, 270. 

Thompson, R. E., 16. 



37< 



INDEX 



Tobacco, 3, 291. 

Tontine measures of Hamilton and Pitt, 78. 

Tooke, T., on bank accounts, 171. 

Treasury of the United States, purchases bonds 
during the crisis of 1857, 281, 285. See 
Independent Treasury. 

Treasury, Secretary of, early position of, 71 ; 
decline of influence of, 216. 

Treasury notes of 1890. See Silver Purchase 
Act. 

Trenholm, W. L., 180, 184. 

Trevisan, B., 157 note. 

Trust companies, deposits of, 177-178 ; de- 
velopment of, after the Civil War, 350. 

Tucker, G., 12. 

Turbolo, 161 and notes. 

Turgot, A. R. J., on direct taxes, 96. 



Unites States v. Louisiana, 107. 

United States, development of its resources 
to 1876, 2-4 ; economic writings of states- 
men, 6-10 ; of scholars, 10-16 ; summary 
of currency history of, 16-21 ; slight in- 
fluence of economic science in, 21-29; 
popular dread of contraction in, 172 ; cur- 
rency history of 1862-1894, 208-215; ad- 
vantages of, in foreign trade, 249-253 ; 
financial relations with other countries, 
253-256 ; in comparison with England as 
to ability to attract gold, 256-260; gold 
imports and exports of 1882-1898, 260- 
264; foreign trade of 1850-1857, 66-69. 

United States notes, acts for, 208, 330, 332- 
334 ; depreciation of, 209 ; partial retire- 
ment of, 210; reissue of, 211 ; retirement 
under the Resumption Act, 212; retire- 
ment discontinued, 213, 360; gold reserve 
for, 214. 



Veazie Bank v. Fenno, 98. 

Vendramin, G., and the Banco del Giro, 156- 

157- 
Venice, see Bank of Venice. 
Vermont, banks of, in i860, 318, 320. 
Vethake, H., economic writings of, 12. 
Virginia, collection of direct tax in, 105 note. 

Wagner, A., on economic method, 42, on 
deposits, 177 note. 

Walker, Amasa, economic writings of, p. 13. 

Walker, F. A., 23, 42 note. 

Wayland, President, economic writings of, 12. 

Wealth, relation of, its growth to general prog- 
ress, 5. 

Webster, Daniel, 7 ; as an economist, 9 ; on 
banks, 18, 314. 

Wells, D. H., 23. 

West The, national and state banks in, 230- 
333 ; national system unsuited to, 233-336, 
362-363 ; explanation of dearth of currency 
in, 245-246; speculation in prior to the 
crisis of 1857, 269, 271-273 ; effect of crisis 
on, 287; slow recovery of, 291, 295, 298- 
299; currency of, in i860, 302; effect of 
crisis of i860 on banks of, 310 : banking 
system in i860, 323-329; extension of 
national system checked in 1865, 350. 

Whigs, theory of, as to the currency, 314. 

White, H., cited, 234 note. 

Wilson, James, and the direct tax in the Con- 
stitution, 95, 96, 97. 

Wisconsin, banks of in i860, 302, 312, 323; 
bank-notes of, 324. 

Wolcott, O., on the public debt, 73 note ; on 
the sinking fund, 87 ; on direct taxes, 98, 
99. 

Yates, Governor, 310. 



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